Copyright 2008 The McGraw-Hill Companies 1-1 1 Limits, Alternatives, and Choices.
-
date post
21-Dec-2015 -
Category
Documents
-
view
215 -
download
0
Transcript of Copyright 2008 The McGraw-Hill Companies 1-1 1 Limits, Alternatives, and Choices.
Copyright 2008 The McGraw-Hill Companies1-2
Chapter Objectives• Economics Defined
–Economic Perspective
• Role of Economic Theory• Microeconomics and
Macroeconomics• Scarce Resources
–The Economizing Problem
• Production Possibilities
O 1.1
Copyright 2008 The McGraw-Hill Companies1-3
What is Economics??
• A social science that deals with how people use scarce resources to produce and distribute goods and services
Copyright 2008 The McGraw-Hill Companies1-4
Scarcity, the Central Theme of Economics
• Scarcity means that while we have unlimited wants, our resources are limited
• Due to scarcity, choices must be made
• Economics deals with how we make such choices
Copyright 2008 The McGraw-Hill Companies1-5
What are the 4 factors of production? (resources, also called inputs)
• Land and natural resources
• Labor
• Capital (note we mean physical capital such as tools, machinery, etc, not money)
• Entrepreneurship
• Note that the purchase of capital goods is referred to as investment
Copyright 2008 The McGraw-Hill Companies1-6
Assumptions about making choices
• Self interest motivation: in other words, we assume the most important person in your life is YOU!
• Purposeful behavior: attempting to maximize your utility
• Rationality, weighing the benefits and costs of your actions
O 1.2
Copyright 2008 The McGraw-Hill Companies1-7
Costs include the opportunity costs
• Opportunity costs, the highest valued option given up when a choice is made
Copyright 2008 The McGraw-Hill Companies1-8
The Economic Perspective
• Marginal Analysis–Marginal Benefits
–Marginal Costs
O 1.3
Copyright 2008 The McGraw-Hill Companies1-9
Benefits of taking economics?
• The economy is a part of our lives
• Better understanding of human behavior
• More informed voter
• Relates to other fields of study
• Its fun!!!!
Copyright 2008 The McGraw-Hill Companies1-10
Costs of taking economics?
• Its Difficult!!!
• Less precision in the social sciences
• Can be mathematical
Copyright 2008 The McGraw-Hill Companies1-11
Macro and Microeconomics
• Macroeconomics– The Aggregate economy: Deals with the
behavior of the economy as a whole: topics like unemployment in the economy, or the rate of inflation, or growth in our GDP, etc.
Copyright 2008 The McGraw-Hill Companies1-12
Macro and Microeconomics
• Microeconomics–Individual Units
• Deals with the behavior of individual firms and households: topics such as the price of oil, or wages of steelworkers, or sales of dvd’s.
Copyright 2008 The McGraw-Hill Companies1-13
Theories Principles and Models
• The Scientific Method• Economic Principle
–Generalizations–Other-Things-Equal Assumption (ceteris paribus)
–Graphical Expression
O 1.4
Copyright 2008 The McGraw-Hill Companies1-14
Economics as a “Science”
• Social sciences, difficult to perform lab experiments of theories
• Important to understand the difference between positive and normative economics
Copyright 2008 The McGraw-Hill Companies1-15
Positive and Normative economics
• Positive Economics• A subset of economics that analyzes
the way the economy actually operates: deals with what is: focuses on cause and effect relationships
Copyright 2008 The McGraw-Hill Companies1-16
Positive and Normative economics
• Normative Economics• A subset of economics founded on the
value judgements and leading to assertions of what should or ought to be
Copyright 2008 The McGraw-Hill Companies1-17
Individual’s Economizing Problem
• Limited Income• Unlimited Wants• A Budget Line• Attainable and Unattainable
Combinations• Tradeoffs & Opportunity Costs• Choice• Income Change
O 1.5
W 1.1
Copyright 2008 The McGraw-Hill Companies1-18
Individual’s Economizing Problem
Average Income, Selected NationsPer Capita Income 2004
SwitzerlandUnited StatesJapanFranceSouth KoreaMexicoBrazilChinaPakistanNigeriaRwandaLiberia
Source: World Bank
$48,23041,40037,18030,09013,980
6,7703,0901,290
600390220110
Country
GLOBAL PERSPECTIVE
Copyright 2008 The McGraw-Hill Companies1-19
Individual’s Economizing Problem
6543210
02468
1012
DVDs$20
Books$10
12
10
8
6
4
2
02 4 6 8 10 12 14
$120 Budget
Income = $120
Pdvd = $20= 6
Income = $120
Pb = $10= 12
Attainable
Unattainable
Quantity of Books
Qu
anti
ty o
f D
VD
s
Copyright 2008 The McGraw-Hill Companies1-20
What is a Production Possibilities Frontier (PPF)? (also called a production possibilities
curve)
• A graph that shows the maximum combinations of goods that can be produced when resources and technology are used efficiently
Copyright 2008 The McGraw-Hill Companies1-21
For simplicity, lets take a world with only 2 products
Lets use beer and pizza (a typical college campus?)
Copyright 2008 The McGraw-Hill Companies1-22
A typical PPF has the following shape:.
Pizza
Bee
r
The curve has a negative slope.The curve is concave to the origin.
Copyright 2008 The McGraw-Hill Companies1-23
All points on the curve correspond to full use of resources.
Pizza
Bee
r
A
B
Copyright 2008 The McGraw-Hill Companies1-24
Points outside the the PPF are not feasible with existing resources.
Pizza
Bee
r
.A
Copyright 2008 The McGraw-Hill Companies1-25
Periods of unemployment or inefficiency in production correspond to points under the PPF.
Pizza
Bee
r
.A
Copyright 2008 The McGraw-Hill Companies1-26
Shape of the PPF? Why Concave?
• If PPF a straight line, we have constant opportunity costs
• If PPF concave, we have increasing opportunity costs
Copyright 2008 The McGraw-Hill Companies1-27
Consider a straight line PPF
Beer
Pizza
Beer given up, the opportunity cost, remains constant
Copyright 2008 The McGraw-Hill Companies1-28
Concave shape, increasing opportunity costs.
Pizza
Bee
rBeer given up, the opportunity cost, is increasing
Copyright 2008 The McGraw-Hill Companies1-29
What is the Law of Increasing Opportunity Costs?
• The opportunity cost of producing a good increases as more of the good is produced
Copyright 2008 The McGraw-Hill Companies1-30
Why does the Law of Increasing Opportunity costs hold?
• Because resources are not perfectly adaptable to all products
Copyright 2008 The McGraw-Hill Companies1-31
Causes of rightward shifts in PPF’s?
• Increase in resources
• Increased productivity
• Improved technology
Copyright 2008 The McGraw-Hill Companies1-32
Can a PPF shift inward (to the left)?
• YES!! For just the opposite reasons as an outward shift such as a loss of resources
Copyright 2008 The McGraw-Hill Companies1-33
Economic growth and the Capital Consumer goods
tradeoff:
Consumer goods
Cap
ital
go
od
s A
B
From which point would an economy grow faster, A or B?? Answer is A, with more capital goods
Copyright 2008 The McGraw-Hill Companies1-34
Production Possibilities Model(using the books example)
• Full Employment• Fixed Resources• Fixed Technology• Two Goods
–Consumer Goods (Pizzas)–Capital Goods (Industrial
Robots)
Copyright 2008 The McGraw-Hill Companies1-35
Production Possibilities Model
Production Possibilities Table
Type of Product
Pizzas (in hundred thousands)
Industrial Robots (in thousands)
Production Alternatives
A B C D E
10 9 7 4 0
0 1 2 3 4
Plot Points to Create Graph…
Copyright 2008 The McGraw-Hill Companies1-36
Production Possibilities Model
Pizzas
Ind
ust
rial
Ro
bo
ts
Attainable
0 1 2 3 4 5 6 7 8 9
14
13
12
11
10
9
8
7
6
5
4
3
2
1
Unattainable
AB
C
D
E
EconomicGrowth
Now Attainable
A’
B’
C’
D’
E’
Production Possibilities Curve
G 1.1
Copyright 2008 The McGraw-Hill Companies1-37
Production Possibilities Model
Pizzas
Ind
ust
rial
Ro
bo
ts
Attainable
0 1 2 3 4 5 6 7 8 9
14
13
12
11
10
9
8
7
6
5
4
3
2
1
Unattainable
AB
C
D
E
Law of IncreasingOpportunity Cost
A’
B’
C’
D’
E’
Production Possibilities Curve
Shape of the Curve
W 1.2
Copyright 2008 The McGraw-Hill Companies1-38
Production Possibilities Model
Pizzas
Ind
ust
rial
Ro
bo
ts
Under or Unemployment
0 1 2 3 4 5 6 7 8 9
14
13
12
11
10
9
8
7
6
5
4
3
2
1
Unattainable
A’
B’
C’
D’
E’
Production Possibilities Curve
U
Copyright 2008 The McGraw-Hill Companies1-39
Present Choices & Future Possibilities
Goods for the Present
Goo
ds f
or t
he F
utur
e
Goo
ds f
or t
he F
utur
e
Goods for the PresentPresentville Futureville
P
F
CurrentCurve
CurrentCurve
FutureCurve
FutureCurve
Compare Two Hypothetical Economies
Implications of International Trade
G 1.2
Copyright 2008 The McGraw-Hill Companies1-40
Marginal benefits and costs
• From a PPC, can we tell which combination of the 2 products is best or optimal? We would need to be able to evaluate the marginal benefits and costs of the products, produce to the point where MB=MC.
Copyright 2008 The McGraw-Hill Companies1-41
Production Possibilities Model
15
10
5
0 1 2 3
a
b
c
d
e
MB = MC
MC
MB
Optimal Allocation of Resources
Quantity of Pizza
Mar
gin
al B
enef
it &
Mar
gin
al C
ost
Copyright 2008 The McGraw-Hill Companies1-42
Pitfalls to Sound Economic Reasoning
• Biases
• Loaded Terminology
• Fallacy of Composition
• Post Hoc Fallacy
• Correlation but not Causation
Last
Word
Copyright 2008 The McGraw-Hill Companies1-43
The Fallacy of Composition
The often mistaken belief that what is true for a part is necessarily true for the whole
Examples: If one student stands up in class, they can see the board better—so if all students stand up will they all see better?
If I had a million dollars, I am rich, so if we all had a million dollars, would be all be rich?
Copyright 2008 The McGraw-Hill Companies1-44
Post Hoc Fallacy
• Post hoc, ergo propter hoc, meaning “after this, therefore because of this”
• Just because one thing happens after another does not mean the first caused the second to occur.
Copyright 2008 The McGraw-Hill Companies1-45
Correlation and causation
A war breaks out in Timbuktu today and the U.S. stock market falls—did the war cause the market to fall?
The economy began growing in 1992 about the same time Clinton was elected president. Does this mean that the Clinton election improved the economy?
Copyright 2008 The McGraw-Hill Companies1-46
Key Terms• economics• economic perspective• opportunity cost• utility• marginal analysis• scientific method• economic principle• other-things-equal as
sumption• macroeconomics• aggregate• microeconomics• positive economics• normative economics• economizing problem• budget line
• economic resources• land• labor• capital• investment• entrepreneurial ability• factors of production• consumer goods• capital goods• production possibilitie
s curve• law of increasing oppo
rtunity costs• economic growth