Micro Economics Lecture 02

7/28/2019 Micro Economics Lecture 02

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Microeconomics

Lecture 2


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Overview of the Previous

Lecture

Microeconomics & Macroeconomics

Positive vs. Normative Economics

Markets

Competitive vs. Non-competitiveMarket Extent


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Topics to be Discussed

Problem of ScarcityFactors of Production

Production Possibility Frontier


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Economics; Another

Perspective Economics is the study of the choices

made by people who are faced with

scarcity. Scarcity is a situation in which

resources are limited but can be used

in different ways; so one good or

service must be sacrificed for another.


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Societys Choices

The decisions of producers,consumers and government

determine how an economic system

answers three fundamental questions:

1. What products do we produce?

2. How do we produce theseproducts?

3. Who consumes the products?


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Factors of Production

1. Natural resources:

The things created by acts of naturesuch as land, water, mineral, oil andgas deposits, renewable andnonrenewable resources.

Factors of production are the

resources that are used to produce

goods and services:


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2. Labor:The human effort, physical and

mental, used by workers in the

production of goods and services.


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3. Physical capital.

All the machines, buildings,

equipment, roads and other objects

made by human beings to producegoods and services.


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4. Human capital:

The knowledge and skills acquired

by a worker through education and

experience.


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5. Entrepreneurship:

The effort to coordinate theproduction and sale of goods andservices. Entrepreneurs take risk

and commit time and money to abusiness without any guarantee ofprofit.


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The Production

Possibilities Frontier (PPF)

The PPF curve

shows the possible

combinations of

goods and services

available to an

economy, given that

all productiveresources are fully

and efficiently

employed.


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The Production


When the

economy is at

point i, resourcesare not fully

employed and/or

they are not usedefficiently.


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The Production


Point g is

desirable

because it yieldsmore of both

goods, but not

attainable giventhe amount of

resources

available.


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The Production


Point d is one of

the possible

combinations ofgoods produced

when resources

are fully andefficiently

employed.


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Scarcity and the PPF

To increase theamount of farm

goods by 10 tons,we must sacrifice100 tons of

factory goods.

Th P d ti


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The Production

Possibilities Frontier (PPF)The PPF curve isbowed out because

resources are not

perfectly adaptable tothe production of the

two goods.

As we increase theproduction of one

good, we sacrifice

progressively more of

the other.


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Shifting the PPF Curve

To increase the

production of one

good withoutdecreasing the

production of the

other, the PPFcurve must shift

outward.


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The PPF curve shiftsoutward as a result of:

An increase in the

economys resources

OR

A technological

innovation that

increases the output

obtained from a given

amount of resources


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From point d, anadditional 200tons of factorygoods or 20 tonsof farm goods arenow possible (or

any combination inbetween).


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Summary

Scarcity & Choices


Natural ResourcesLabor

Physical Capital

Human Capital

Entrepreneurship

Production Possibility Frontier


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Why StudyMicroeconomics?

Microeconomic concepts are used by

everyone to assist them in making

choices as consumers and producers.


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Why Study

Microeconomics?

Two Examples

Corporate Decision Making

Ford & development of its SportUtility Vehicle (SUV)

Public Policy Design

Deregulation oftelecommunication policy

Wh S d


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Why Study

Microeconomics?

Ford & development of its Sport UtilityVehicle (SUV)

Questions Consumer acceptance and demand

Production cost

Pricing strategy Risk analysis

Organizational decisions

Government regulation


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Why Study

Microeconomics?

Deregulation of Telecommunication

policy

Questions

Impact on consumers

Impact on service providers

How to enforce the policy

What are the benefits and costs?


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Upcoming Topics

Real Prices vs. Nominal Prices

Demand and Supply: Basic Concepts

Market Mechanism


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Microeconomics

Lecture 2

Documents

Micro Economics Lecture 02