Upload
tingztieyka
View
180
Download
1
Embed Size (px)
Citation preview
ECO 120Principles of Economics
CHAPTER 1Introduction to Economics
What is Economics?
Economics
Microeconomics Macroeconomics
Study of how people use their limited resources to fulfill unlimited wants and need.
study of individual economic unit.
ex: household, firm and government choice.
studies the aggregate behavior of the entire economy
ex: unemployment, inflation, GDP, international trade, etc
Economists study the choices we make and also the consequences of these choices
Economic Concepts Scarcity
• scarce – impossible to satisfy our unlimited wants – limited resources• wants always exceeding limited resources• Peoples’ wants are greater than the economy’s ability to produce desirable goods & services• Because our resources are limited, we must sacrifice one thing for another.
SCARCITY CHOICES
Choices• because of scarcity, choose from the available alternatives.
Opportunity Cost• the second best alternative that has to be forgone for another choice which gives more satisfaction.• THE OPPORTUNITY COST of an action is the next best foregone alternative.
Production Possibilities Curve (PPC)
• Various possible combinations of goods and services produced within a specified time with all its resources fully and efficiently employed.
• A curve that shows the maximum combinations of two outputs that an economy can produce, given its available resources and technology.
Assumption to Illustrate PPC
– Producing 2 goods– Fixed resources– Fixed technology– Producing at full employment
FIGURE 1-1: Production Possibility Frontier
At point A, can produce 20 units of clothes & 4 units of potatoes.
At B, can produce 18 unit of clothes and 7 unit of potatoes.
Without more resources, points outside PPC are unattainable (Point E)
Points “inside” the PPC are inefficient – waste of resources (Point D).
CLOTHES
9
19A
C
POTATOES0 4 14
•E
•D
15
20
scarcity
Opportunity cost
choices
Movement from one point to another – point A to B
B18
7
Insights From The PPC Model
Scarcity - The quantities of the goods that can be produced fall short of what is desired .
Choice - combinations of goods among which society must choose.
Opportunity cost - When there is efficiency in production, the only way to have more of one good is to have less of another.
PPC - Example
1 2 3 4 5
5
9
12
1514
a
b
c
d
e
f
clothing
food
Figure 1
Food Clothing
0 15
1 14
2 12
3 9
4 5
5 0
Production Possibilities
Good Y
4
910
A
B
Opportunity cost ofGood X = 1 unit of good Y
Opportunity cost ofGood X = 2 unit of good Y
2
Good X0 3 4 1213
Production Possibility Curve
opportunity cost of good X rises so that it is much higher at point B (1 unit of good X costs 2 unit of good Y).
Opportunity costs of economic action not constant, but vary along PPC
Combination of goods
Radios (R) (unit)
Televisions (TV) (unit)
Opp. cost of radio (Total)
Opp. cost of radio(per unit)
A 0 10 - -
B 4 9 1 TV ¼ = 0.25 TV
C 7 7 2 TV 2/3 = 0.67 TV
D 9 4 3 TV 3/2 = 1.5 TV
E 10 0 4 TV 4/1 = 4 TV
Increasing opp. cost
Combination of goods
Radios (R) (unit)
Televisions (TV) (unit)
Opp. cost of radio (Total)
Opp. cost of radio
(per unit)
A 0 12 - -
B 2 10 2 TV 2/2 = 1 TV
C 4 8 2 TV 2/2 = 1 TV
D 6 6 2 TV 2/2 = 1 TV
E 8 4 2 TV 2/2 = 1 TV
F 10 2 2 TV 2/2 = 1 TV
g 12 0 2 TV 2/2 = 1 TV
Constant opp. cost
Shift of PPC- PPC depends on the availability of the factors of production (resources) and technology.
Decrease
Increase
Good Y
Good X
0
Good Y
Good X
Initial PPF
New PPF
Why would the PPF shift outward?
-- more resources: land, labor, capital, and human capital (economic growth)
-- technological progress
-- larger population
0
10
20
30
40
50
60
70
0 10 20 30 40 50 60 70
Production of Food
Pro
du
cti
on
of
Clo
thin
g
PPC1
PPC2
Production Possibilities Curve
Improvement that benefits both products. PPC shifts outward (to the right), from PPC1 to PPC2.
Increase in Resources or Technology
Production Possibilities Curve
0
10
20
30
40
50
60
0 10 20 30 40 50 60 70
Production of Food
Pro
du
ctio
n o
f C
loth
ingImprovement that benefits Food production only – from PPC1 to PPC2
PPC1
PPC2
Production Possibilities Curve
0
10
20
30
40
50
60
70
0 10 20 30 40 50 60 70
Production of Food
Pro
du
ctio
n o
f C
loth
ing
Improvement that benefits clothing production only – from PPC1 to PPC2
PPC1
PPC2
Shape of The PPFs
Good Y
Good X
Increasing Opportunity Costs
Constant Opportunity Costs
Decreasing Opportunity Costs
Basic Economic Problems• What to produce?
– types of goods the society wants to produce given limited factors of production (eg: radios or televisions)
• How much to produce?
– Quantity of goods to be produced
• How to produce?
– Methods of production (labor or capital intensive)
– The cheapest method of production – minimum cost of production
• For whom to produce?
– Target group (rich, poor, working people, etc)