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Welcome to Econ 1. Introduction to Microeconomics Week 2.2, Tuesday, February 15. Review: Definitions. Good : is anything that an individual wants to have more of, at zero price. Resource : Anything that can be used to produce goods.

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welcome to econ 1

Welcome to Econ 1

Introduction to Microeconomics

Week 2.2, Tuesday, February 15

review definitions

Review: Definitions

Good : is anything that an individual wants to have more of, at zero price.

Resource: Anything that can be used to produce goods.

Scarcity: A good is scarce if the amount desired at zero price is more than the amount available at zero price.

(Scarce good = Economic Good)

review assumptions
Review:Assumptions
  • Humankind has unlimited wants
  • Our resources are limited
  • Scarcity: Individually, and as a Society, we do not have enough resources to produce all the things we want.
review implications of scarcity
Review:Implications of Scarcity
  • Choice: people must choose which goods to acquire.
  • Economic Cost: The Cost of any action, is the personal value of the next highest valued alternative given-up.
costs economic vs accounting
Costs: Economic vs. Accounting
  • Accounting Cost: The explicit expenditure for a given activity.
  • Economic Cost: The Cost of any action, is the personal value of the next highest valued alternative given-up.
  • Economic Cost includes Explicit & Implicit
  • Sunk Cost: Past expenditures that no longer represent an alternative (Not a part of Economic Cost)
review implications of scarcity1
Review:Implications of Scarcity
  • Choice: people must choose which goods to acquire.
  • Economic Cost: The Cost of any action, is the personal value of the next highest valued alternative given-up.
  • Competition: We are in a state of competition for the use of resources
forms of competition in society
Forms of Competition in Society
  • Violence, or Threat of Violence
  • Social/Political: competition on the basis of some limited behavior or characteristic
  • Economic/Market: competition based on offering the highest value in exchange.
scarcity society choices
Scarcity  Society Choices
  • What to produce? Goal find the mixture of outputs that maximizes society’s value.
  • How to produce? Goal: find the optimal mix of inputs to maximize technical output.
  • For whom to produce? Who will get to consume the goods produced.
what economics is about
What Economics Is About
  • Microeconomics: decisions of individuals and firms: what to buy and what to produce.
  • Macroeconomics: the whole economic system and the role of government.
mechanisms of choice
Mechanisms of Choice
  • Political: our representatives make choices
  • Economic/market: individuals and firms make choices based on relative prices about what to produce
ten principles of economics
Ten Principles of Economics
  • Individual decision making
  • How people interact
  • The economy as a whole
individual decision making
Individual Decision Making
  • People Face Trade-offs: Choice
  • Opportunity Cost
  • Rational people think at the margins
  • People respond to incentives
how people interact
How People Interact
  • Trade Makes everyone better off
  • The market system organizes production efficiently
  • Markets outcomes can sometimes be improved upon by Government
the economy as a whole
The Economy as a Whole
  • The standard of living depends on productivity
  • Inflation results from too much Money
  • The short-run trade-off: inflation vrs. unemployment
slide16

Circular Flow Diagram of the Exchange Economy

Goods &

Services

Product

Markets

Goods &

Services

$'s

$'s Revenue

HOUSEHOLD

FIRMS

$'s

$'s Income

Inputs

Resources

Resource

Markets

economic agents decision making
Economic Agents & Decision-making
  • Households: Decisions: What to sell? What to buy? Assume Maximize Utility
  • Firms: Decisions: What inputs to use? What to produce? Assume Maximize Profits. ∏ = Total Revenue – Total Cost
  • Markets: Factor Markets, Product Markets

Role of Money: The medium of exchange

definition of money
Definition of Money
  • Currency in Circulation: Currency outside of Banks in the hands of households,or firms
  • Checkable deposits in Banks, Savings & Loans, Credit Unions
gains from specialization trade
Gains from Specialization &Trade
  • Production Possibilities
  • Resource FishCoconuts
  • Crusoe: 8 or 8
  • Friday: 10 or 20
opportunity cost in production
Opportunity Cost in Production

Crusoe: 8 F = 8 C 1 F = 1C and 1C = 1F

Friday: 10 F = 20 C 1 F = 2C and 1C = ½ F

Thus Crusoe has a comparative advantage in the production of fish ( 1F = 1C) and Friday has a comparative advantage in the production of Coconuts

( 1C = ½ F)

separate production possibilities
Separate Production Possibilities

Crusoe

Friday

Fish

Fish

10

8

8

Coco

20

Coco

pre specialization production
Pre-Specialization Production
  • ResourceFishCoconuts
  • Crusoe: 4 and 4
  • Friday: 5 and 10
  • Total Output: 9 and 14
output with specialization
Output with Specialization

ResourceFishCoconuts

  • Crusoe: 8 and 0
  • Friday: 1 and 18
  • Total Output: 9 and 18
results of specialization
Results of Specialization
  • No increase in Resources
  • No increase in effort
  • Increased output by 4 coconuts
  • Increased output will be shared by the two people or countries so as to make both better off
apply reasoning to more than two resources
Apply Reasoning to more than two Resources
  • Analyze production decisions using several resources with different relative abilities
  • How to organize production to maximize output
  • The graphical technique
graph production possibilities function
Graph: Production Possibilities Function

Assumptions:

1. Fixed resources: 10 acres in rows.

2. Fixed technology: current knowledge of how to produce.

3. Resources vary in relative productive ability.

graph mechanics
Graph Mechanics
  • The curve divides the space: interior points possible; Points beyond impossible
  • Slope: Rise/ Run: The slope reflects the relationship: Negative, more corn means less wheat, more wheat means less corn
  • Shape: The concave shape reflects increasing cost of production for either good.
changing assumptions shifts the curve
Changing assumptions Shifts the Curve
  • An Increase in resources
    • Shifts the curve outward
  • An increase in technology of Wheat production: Effects on Cost
    • Lowers cost of producing Wheat
    • Raises the cost of producing corn