Economics 1 2013-14

Economics 1 (EC107) 2013-14: Micro (Term 1)

Robin Naylor, Department of Economics, Warwick

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Economics 12013-14

(Lecture 1)

Welcome!


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Economics 1Accompanying 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


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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


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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


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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


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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:


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Introduction


Food

Defence

0 F-Max

D-Max The Production Possibility Curve

The Production Possibility Set


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Introduction


Food

Defence

0 F-Max

D-Max

. a

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

. c


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Introduction


Food

Defence

0 F-Max

D-Max

. a

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).

. b

. d

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


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Introduction


Food

Defence

0

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?


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Introduction

Food

Defence

0

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?

IC


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Introduction

Food

Defence

0

A set or family of Indifference Curves

IC1

IC2

IC3


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Introduction

Food

Defence

0

. a

‘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 . . .

. b

. d


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Introduction

Food

Defence

0

. a

. b

. d

On which IC would society like most to be?

At what point is this?

Where MRS = MRT.


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Introduction

Gains from Trade• Consider 2 economies, Red and Blue:

X

Y

PPC-R

PPC-B

Who has an absolute advantage in producing X?

And Y?


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IntroductionGains from Trade• Consider 2 economies, Red and Blue:

X

Y

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.

dX

dX


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Introduction

X

Y

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 that at 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?

dX

dXdY=1

dY=3

a-B

a-R


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Introduction

X

Y

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?

a-B

a-R

b-R

b-BdY=1

dY=1


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Introduction

Key Concepts

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


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Introduction

Key Concepts

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


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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.

Economics 1 2013-14

Documents

Transcript of Economics 1 2013-14