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Economics 1 2013-14. (Lecture 1) Welcome!. Economics 1. Accompanying Resources Module Website see various tabs (thumbprint, assessment, feedback) see links to slides and pod/webcasts/transcripts Module Manual (with reading list) Seminar Work and Problem Sets and e-forums

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economics 1 2013 14

Economics 12013-14

(Lecture 1)

Welcome!

Robin Naylor, Department of Economics, Warwick

economics 1

Economics 1

Accompanying Resources

Module Website

see various tabs (thumbprint, assessment, feedback)

see links to slides and pod/webcasts/transcripts

Module Manual

(with reading list)

Seminar Work and Problem Sets and e-forums

Departmental Handbooks and Web-Sites

MyEconomics Portal

Robin Naylor, Department of Economics, Warwick

economics 11

Economics 1

Organisation (see module manual for details)

Lecture timetable

Lecture notes/handouts

Seminar/e-forum arrangements (from week 3)

Personal Essays

Examination and Assessment

Robin Naylor, Department of Economics, Warwick

economics

Economics

Readings (Micro)

Besanko and Braeutigam, Microeconomics 4th Edition, Wiley, 2011

Estrin, Laidler and Dietrich (ELD), Microeconomics, 2008

+ Many other textbooks plus other literature: see Module Manual

Robin Naylor, Department of Economics, Warwick

term 1 micro topics
Term 1: Micro Topics
  • Introduction Scarcity and Trade; Markets
  • Topic 1 Household behaviour
  • Topic 2 Firm behaviour
  • Topic 3 Product markets
  • Topic 4 Factor markets
  • Topic 5 Market Structure, Efficiency and Failure

Robin Naylor, Department of Economics, Warwick

introduction
Introduction
  • The fundamental problem of scarcity
    • Cause: excess of wants over ‘natural’ supply
    • Consequences:

(i) Choices over production

(ii) Trade-offs and opportunity costs

(iii) Rationing of distribution (Markets etc . . .)

Consider a 2-good economy:

Robin Naylor, Department of Economics, Warwick

introduction1
Introduction
  • The fundamental problem of scarcity

Defence

D-Max

The Production Possibility Curve

The Production Possibility Set

0

F-Max

Food

Robin Naylor, Department of Economics, Warwick

introduction2
Introduction
  • The fundamental problem of scarcity

Defence

. c

D-Max

What can you say about points a, b and c?

. b

. a

0

F-Max

Food

Robin Naylor, Department of Economics, Warwick

introduction3
Introduction
  • The fundamental problem of scarcity

The MRT is the amount of one good (D) we have to give up in order to have an extra unit of the other good (F).

Defence

D-Max

. b

So the MRT is increasing in the case of the concave PPC. Why?

. d

. a

0

F-Max

Food

Robin Naylor, Department of Economics, Warwick

introduction4
Introduction
  • The fundamental problem of scarcity

The PPC shows us the trade-off that Society has to make between 2 goods.

Note also relationship to Opportunity Cost

What about the trade-off that the Society is prepared to make?

Defence

0

Food

Robin Naylor, Department of Economics, Warwick

introduction5
Introduction

The slope of the Indifference Curve shows us how much of one good the society is prepared to give up (‘trade off’) in order to have an extra unit of the other good:

This is the Marginal Rate of Substitution (MRS).

Why might it be convex?

Defence

IC

0

Food

Robin Naylor, Department of Economics, Warwick

introduction6
Introduction

A set or family of Indifference Curves

Defence

IC3

IC2

IC1

0

Food

Robin Naylor, Department of Economics, Warwick

introduction7
Introduction

‘a’ is not technically efficient.

‘b’ is.

So is ‘d’. So how can we choose between ‘b’ and ‘d’?

They are both ‘technically’ efficient.

But they are not both Allocatively Efficient . . .

Defence

. b

. d

. a

0

Food

Robin Naylor, Department of Economics, Warwick

introduction8
Introduction

On which IC would society like most to be?

At what point is this?

Defence

. b

. d

. a

Where MRS = MRT.

0

Food

Robin Naylor, Department of Economics, Warwick

introduction9
Introduction

Gains from Trade

  • Consider 2 economies, Red and Blue:

Y

Who has an absolute advantage in producing X?

And Y?

PPC-R

PPC-B

X

Robin Naylor, Department of Economics, Warwick

introduction10
Introduction

To raise output of X by the amount dX, the required reduction in Y is smaller in Blue than in Red.

In other words, the Opportunity Cost of the extra X is lower in Blue than in Red.

We say that Blue has a Comparative Advantage in the production of X.

And Red has a Comparative Advantage in producing Y.

Gains from Trade

  • Consider 2 economies, Red and Blue:

Y

dX

dX

X

Robin Naylor, Department of Economics, Warwick

introduction11
Introduction

Suppose initially, Blue is at point ‘a-B’ and Red is at ‘a-R’.

If Blue gives up one unit of Y, it raises output of X by dX.

Suppose thatat the same time Red cuts production of X by the same amount, dX: then it can raise output of Y by 3 units.

So what is the total change in ‘World’ production of X?

And of Y?

Y

dY=3

a-R

dX

a-B

dY=1

dX

X

Robin Naylor, Department of Economics, Warwick

introduction12
Introduction

So with an unchanged total production of X and a higher total production of Y, the countries could*:

Trade such that Blue exports dX to Red and, in return, Red exports 2 units of Y to Blue.

What would this look like in terms of each country’s PPC?

Y

b-R

dY=1

a-R

b-B

dY=1

a-B

X

Robin Naylor, Department of Economics, Warwick

introduction13
Introduction

Key Concepts

  • Scarcity
  • Wants
  • Opportunity Cost
  • Trade-offs
  • Rationing
  • Markets
  • Efficiency
  • Equity
  • Constraints
  • Changes at the margin

Robin Naylor, Department of Economics, Warwick

introduction14
Introduction

Key Concepts

  • Choices
  • Preferences
  • Constraints
  • PPC
  • MRS
  • MRT
  • Optimisation
  • Absolute advantage
  • Comparative advantage
  • Specialisation
  • Trade

Robin Naylor, Department of Economics, Warwick

introduction15
Introduction

Self-study Questions

  • Show and explain a PPC for a country
  • What determines the position and shape of the PPC
  • Explain the concept of the MRT
  • Economists often argue that Choices depend on two key concepts: Preferences and Constraints. Explain this argument.
  • Explain the concept of the MRS
  • Define ‘trade-offs’ (in terms of both preferences and constraints) and ‘Opportunity Cost’ and explain their meanings in a diagram using the concept of the PPC.
  • What is meant by Absolute Advantage?
  • What is meant by Comparative Advantage? Explain how the concepts of comparative advantage and of opportunity cost are related.
  • Show how trade and specialisation can lead to potential gains for both parties in a trade.

Robin Naylor, Department of Economics, Warwick

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