101 lecture 2

Microeconomics !

Lecture 2 !

Production Possibilities Frontier

Terms and Concepts• Scarcity

• Choices

• Tradeoffs

• Rational

• Incentives

• Behavior

• Utility

• Margin

• Markets

• Circular-Flow Diagram

• Production Possibilities Frontier

• Macro vs. Micro

• Positive vs. Normative

• Absolute Advantage

• Comparative Advantage

Intent !

Result

Fell Pushed Jumped

Result the same

Utopia vs. Reality

Reality always loses

Utopia vs. Reality

Reality always loses

Realistic Alternatives

Positive

Normative

PositiveWhat is

Normative

PositiveWhat is

NormativeFact

PositiveWhat is

NormativeWhat ought to be

PositiveWhat is

NormativeWhat ought to be

Values

FactsTrue or False

Values

FactsTrue or False

ValuesGood or Bad

Four Questions

What to make? How much to make? Who will make it?

Who will consume it?

Four Questions

How you slice the pie

determines the size of

the pie

Who decides? Government

or Individuals

Planned Economy vs.

Market Economy

Planned Economy vs.

Market Economy

Government Economy vs.

Individual Economy

Adam Smith !

Market Economy Individual Economy

Karl Marx !

Planned Economy Government Economy

Adam Smith The Wealth of Nations

Invisible Hand

individual self interest promotes

wealth

Price System is a

Knowledge System

Voluntary Exchange

buyer and seller both win

Voluntary Exchange

Every Exchange

One Price Two values

Every Exchange

Buyer ValueSAR

Buyer Value

Seller ValueSAR

Buyer Value

Seller ValueSAR

Buyer Value

Seller Value

Price Range?SAR

Buyer Value

Seller Value

Price Range?SAR

Buyer Value

Seller Value

Price Range?SAR

Buyer Value

Seller Value

Price Range?SAR

Buyer Value

Seller Value

Price Range?SAR

70What if the price

was 120?

Buyer Value

Seller Value

Price Range?SAR

70What if the price

was 120?

What if the price was 60?

Buyer Value

Seller Value

Price Range?SAR

Buyer Value

Seller Value

Price Range?SAR

Buyer Value

Seller Value

Price Range?SAR

Buyer Value

Seller Value

Price Range?SAR

Buyer Value

Seller Value

Price Range?

What can government do?

Protect property rights

What can government do?

Property Rights

the ability of an individual to own

and control resources

Property Rights

It’s cheaper to pay someone else than

to do it myself

It’s cheaper to pay someone else than

to do it myself

Opportunity Cost is too high

Opportunity Cost

The highest valued alternative

iPhone

0 200 400 600 800 1000

iPhone

0 200 400 600 800 1000

iPhone

0 200 400 600 800 1000

iPhone

0 200 400 600 800 1000

iPhone

0 200 400 600 800 1000

iPhone

0 200 400 600 800 1000

iPhone

0 200 400 600 800 1000

iPhone

0 200 400 600 800 1000

iPhone

0 200 400 600 800 1000

iPhone

520 200

0 200 400 600 800 1000

iPhone

520 200

0 200 400 600 800 1000

iPhone

520 200

400 400

0 200 400 600 800 1000

iPhone

520 200

400 400

0 200 400 600 800 1000

iPhone

520 200

400 400

250 500

0 200 400 600 800 1000

iPhone

Efficient Combinations

520 200

400 400

250 500

0 200 400 600 800 1000

iPhone

520 200

400 400

250 500

0 200 400 600 800 1000

iPhone

Inefficient

520 200

400 400

250 500

0 200 400 600 800 1000

iPhone

Inefficient

520 200

400 400

250 500

0 200 400 600 800 1000

iPhone

Inefficient

Impossible with current technology

520 200

400 400

250 500

0 200 400 600 800 1000

iPhone

Inefficient

New innovation helps iPhone

0 200 400 600 800 1000

iPhone

Inefficient

0 200 400 600 800 1000

iPhone

Inefficient

0 200 400 600 800 1000

iPhone

Inefficient

New innovation helps both

0 200 400 600 800 1000

iPhone

Inefficient

0 200 400 600 800 1000

iPhone

Inefficient

0 200 400 600 800 1000

iPhone

Inefficient

Now possible

Marshmallow Movie

How many marshmallows would

you have in 24 hours if you started with one and they were doubled every

15 minutes?

The number of marshmallows would fill 1,200 earths

Slope Percentage Change

Relationships Cause and Effect

Formulas

Percentage Change

% ∆ New - Old

Notation % Percent Change !

% Percentage Change

% Percentage Change New - Old

7 - 5 5

=7 - 5 5

= =7 - 5 5

= = .47 - 5 5

= = .4 =7 - 5 5

= = .4 = 40%7 - 5 5

Last year the price was 6. This year the price is 9. What is the percentage change? !

New - Old Old

9 - 6 6

New - Old Old

=9 - 6 6

New - Old Old

=9 - 6 6

New - Old Old

= =9 - 6 6

New - Old Old

= = .59 - 6 6

New - Old Old

= = .5 =9 - 6 6

New - Old Old

= = .5 = 50%9 - 6 6

Quantity

Correlation !

Causation

Why are some rich and

others poor?

David Ricardo (1772 - 1823)

!Principles of

Political Economy and Taxation

Comparative Advantage

Absolute Advantage !

Produce more with the same resources

Comparative Advantage !

Produce at a lower opportunity cost

The basis for trade is comparative advantage,

not absolute advantage.

Gale Ali Total Hours

Make a Hook

Catch a Fish

Total Hours

7 3 10

No Trade 2 Hooks and 2 Fish

10 Hours - 5 Hours per Fish

Make a Hook

3 3/4 Fish

2 2 Fish

Catch a Fish

4 1 1/3 Hook

1 1/2 Hook

Total Hours

7 3 10

No Trade 2 Hooks and 2 Fish

10 Hours - 5 Hours per Fish

Make a Hook

2 hooks 6 hours

Catch a Fish

2 fish 2 hours

Total Hours

With Trade 2 Hooks and 2 Fish

8 Hours - 4 Hours Per Fish

Markets !

Where Buyers and Sellers Trade

Households

Individuals in a home

Sell Factors of Production

Buy Goods & Services

Buy Factors of Production

Sell Goods & Services

Product Markets

Markets for finished goods and services

- Stores -

Factor Markets

Markets for goods and services used to make

products

Households

Labor Capital Natural

Resources Entrepreneurs

Households

Goods & Services

Households

SpendingWages & Payments

for Factors

Goods & Services

Households

for Factors

Goods & Services

Households

Product Markets

for Factors

Goods & Services

Households

Factor Markets

Product Markets

The Market System !

Trust Private Property Rights

Rule of Law

101 lecture 2

Economy & Finance

Transcript of 101 lecture 2

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