Microeconomics

Lecture 3

Production Possibilities Frontier

Exam 1 Review

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

orIndividuals

Planned Economyvs.

Market Economy

Planned Economyvs.

Market Economy

Government Economyvs.

Individual Economy

Adam SmithMarket Economy

Individual Economy

Karl MarxPlanned Economy

Government Economy

Adam Smith

The Wealth of Nations

1776

Invisible Hand

Invisible Hand

individualself interestpromotes

wealth

Price System is a

Knowledge System

Voluntary Exchange

buyer and seller both win

Voluntary Exchange

Every Exchange

One PriceTwo values

Every Exchange

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

Production Possibilities Frontier

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Now possible

Exam 1 review

• Terms and Concepts

• Formulas

• Blog

• Book

• 25 multiple choice questions

• No cell phones - bring calculator

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

Formulas

Formulas

Percentage Change

% ∆New - Old

Old