Microeconomics, By Dr. Malcolm Rutherford
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Transcript of Microeconomics, By Dr. Malcolm Rutherford
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8/14/2019 Microeconomics, By Dr. Malcolm Rutherford
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ECON 103
Microeconomics
Dr. Malcolm Rutherford
Office: BEC 340
Office hours: Monday and
Thursday 2:30-3:30 or by
appointment. Office phone: 721-6481
E-mail: [email protected]
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Econ 103
Microeconomics
Text
Web sites
Help Centre
Study guide exercises
Outline
Exams
Grading
Other policies, rules, and
regulations
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Economics
Economics is about the economy
The way in which individuals and
social groups make a living
Provides the material well being ofindividuals and society
Economics can be defined in terms
of subject matter or in terms of
techniqueschoice in the face ofscarcity
Techniques of economic analysis
sometimes applied to non-economic
subject matter
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Economic Systems
What goods and services to
produce How to produce them
technology, specialization, and
teams Where and when to produce
them
How to distribute themwhogets how much?
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Economic Systems
The economy and society
The economy and technology
The Economy and the natural
world
EconomySociety
Nature
Technology
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Economic Systems
Traditional Economies
Hunting and gathering societies Command Economies
Ancient Egypt, Ancient China,
Soviet Union
Market Economies
The growth of market economies
in Europe
Mixed EconomiesThe variable place of
government
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The Market Economy
Production and distribution resultlargely from individuals pursuingtheir own self interest, in theinstitutional context of markets
Specialization and exchange Decentralized
Complex and interdependent
How does this complex anddecentralized system work, ratherthan becoming chaotic?
Markets provide information andincentives (prices, profits) and
coordinate economic decisions Microeconomics and
Macroeconomics
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Basic Concepts:
Scarcity
Limited resourcesland,
labour, capital, andentrepreneurship
Unlimited wants
Scarcity of resources relative towants
Need for choice betweenalternative uses of resources
This leads to the next importantconcept: cost
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Basic Concepts:
Opportunity Costs
Cost derives from scarcity and
the need to make choices The cost of doing one thing is
what is foregone
Explicit costs and implicit costs
The economists and the
accountants definition of cost
The implicit cost of capital and
economic profit
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Basic Concepts:
Decisions at the Margin
Some decisions involve all or
nothing choices Many decisions involve
decisions at the margin
How much of something shouldI consume or produce?
Marginal cost and marginal
benefit Optimal point where MC=MB
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Decisions at the Margin
Optimal rounds of golf per week
for Dr. R.
Q
$
Q*
MC
MB
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Basic Concepts:
Allocative Efficiency
Allocative efficiency is where
resources are allocated to theirhighest valued use
Marginal benefit=Marginal cost
At the margin people value thisgood (in terms of willingness toforego other things) just what itcosts to produce (in terms ofopportunity costs)
Allcosts and benefits must beincluded
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Efficient Use of
Resources
MC
MB
Q of good X
Cost exceeds benefitsBenefit exceedscost
What must be
foregone for an
additional unit
What people
will forego for
an additionalunit
Q*
$
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Basic Concepts:
Incentives
People tend to respond to
economic incentives Price changes
Opportunities to increase
income or reduce debts Changes in incentives vs moral
suasion
Unintended consequences andincentives
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Basic Concepts of
Interaction
There are gains from
specialization and trade Markets tend to equilibrium
(most of the time)
Markets tend to lead toeconomically efficient
outcomes (most of the time)
Government intervention cancorrect market failures
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Some Basic Models:
Production Possibilities
Production possibility curve
gives a simplified representationof an economy
Two goods
Given resources and technology Can use this model to think
about opportunity cost and
concepts of efficiency
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Production Possibility
FrontierWith given resources and
technology
Quantity
of
Militarygoods
Quantity of Civilian
goods
Attainable
Unattainable
PPF
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Opportunity Cost
Productive efficiencyon the
PPF Tradeoffs along the frontier
Opportunity cost
Constant opportunity cost
Increasing opportunity cost
Allocative efficiencywhere
on the PPF?
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Economic Growth
Economic growth can be represented as an
outward shift in the PPF due to
accumulation of capital or technological
change
X
Y
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Some Basic Models:
Gains from Trade
Without trade a person or nation islimited to their own domestic
production possibilities curve Gains from trade Absolute advantagebased on
different costs
Comparative advantagebased ondifferent relative costs
An example of two individuals withdifferent abilities or endowmentsand two activitieshunting for meator collecting plants and berrieseach with constant marginalopportunity costs
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Gains from Trade
Meat (kgs)
Plants (kgs)
Person 1
Person 2
10
20
10 Plants (kgs)
20
1 kg meat costs 2 kgs plants
1 kg plants costs .5 kg meat
1 kg meat costs .5 kg plants
1 kg plants costs 2 kgs meat
Meat (kgs)
Absolute Advantage
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Gains from Trade
Plants (Kgs)2010
10
20
a
b
b
c Person 1s ppf
Person 2s ppf
Trade line
Meat (kgs)
The trade line drawn here assumes terms
of trade of 1:1 and equal division of the
gains from trade
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Gains from Trade
Comparative AdvantageMeat
Plants
Meat
Plants
40
30
10
20
1M=1.33P
1M=0.5P
Person 1
Person 2
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Gains From Trade
Comparative Advantage
Assume trade at 1P=1M
30
40
20
10
30
10
10
P
P
M
M
Person 1produces 40P and
trades 10
Person 2 produces
20 M and trades 10
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Some Basic Models:
Circular FlowCircular Flow Diagram
Goods marketsFactor markets
Households
Firms
sales revenues
expenditures
incomes
Factor
payments
factors
inputs
goods
outputs
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The Market Economy Individual and households choose
what factors to supply for incomeand what goods to spend that income
on Firms choose what goods to produce
and what factors to buy in order toproduce them
Interdependence Choice and constraints on choice
Incentives
Markets and efficiency
Market failures