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GOODS WORK CHOICES
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What is Economics ?What is Economics ?
“Economics is the study of mankind in the everyday business of life.”
Alfred Marshall (1842 -1924)
Economics is the study of Economics is the study of choices made by peoplechoices made by peoplewho are faced with scarcity.who are faced with scarcity.*Scarcity is a situation in *Scarcity is a situation in which resources are limited which resources are limited and have alternative uses.and have alternative uses.
What Is Economics ?
GOODSGOODS
WORKWORK
CHOICES
ECONOMIC QUESTIONS
• What goods and services do we produce ?• How do we produce these goods and
services ?• Who consumes the goods and services
produced ?
SCARCITY AND PRODUCTION POSSIBILITY CURVES
• Production Possibility Curve A visual representation of tradeoffs that
arise in an economy that produces two goods.
A picture of the choices which can be made when considering the production of two goods.
PRODUCTION POSSIBILITY CURVE
(FRONTIER) A production possibility curve shows
how all of an economies available RESOURCES can be used to produce various combinations of goods and services.
WHAT ARE RESOURCES?WHAT ARE RESOURCES?• Labor -- human effort used to produce• Physical capital
-- machines, buildings equipment• Human Capital -- knowledge and skills acquired by workers• Natural Resources (LAND) -- things created by acts of nature and used
to produce
YY
XX
ThousandsThousandsofofcomputers computers per yearper year
Number of Space Missions Per YearNumber of Space Missions Per Year
380380
44
ee
300300
55
ff
PRODUCTION POSSIBILITYPRODUCTION POSSIBILITYCURVECURVE
200200
22
i (inferior)i (inferior)(idle resources)(idle resources)
ATTAINABLEATTAINABLEUNATTAINABLEUNATTAINABLE
GRAPHING POSSIBILITIES
SCARCITY• The limit to available resources;Illustrated by the envelope of the
production possibility curve. To obtain more of one of the two choices,
one must give up more of the other choice.
MACROECONOMICS vs
MICROECONOMICS
THE STUDY OF:(MICROECONOMICS)• choices made by
individual consumers and firms & how these decisions affect the market for a particular good or service.
(MACROECONOMICS)• The nations
economy as a whole. Issues include:– unemployment– inflation– budget deficit– trade deficit
MICROECONOMIC ANALYSIS
We use microeconomic analysis • To understand how markets work• To make personal or managerial
decisions• To evaluate merits of public choices
MARKETMARKET
• An arrangement which allows An arrangement which allows buyers and sellers to buyers and sellers to exchange money and goods.exchange money and goods.
THE ECONOMIC WAY OF THE ECONOMIC WAY OF THINKINGTHINKING
John Maynard KeynesJohn Maynard Keynes““The theory of economics does not The theory of economics does not
furnish a body of settled conclusions furnish a body of settled conclusions immediately applicable to policy. It is a immediately applicable to policy. It is a method rather than a doctrine, an method rather than a doctrine, an apparatus of mind, a technique of apparatus of mind, a technique of thinking which helps its processor to thinking which helps its processor to draw correct conclusions.”draw correct conclusions.”
SIMPLIFYING SIMPLIFYING ASSUMPTIONSASSUMPTIONS
(Eliminate Irrelevant Detail)(Eliminate Irrelevant Detail)1. People act on the basis of self 1. People act on the basis of self
interest.interest.2.People make informed decisions 2.People make informed decisions
based on information from:based on information from:a) Producer;a) Producer;b) Government.b) Government.
GIVEN :GIVEN :• My income doesn’t change;• No other major expense occurs;• I don’t suffer a major illness or injury;• etc.....I should be able to buy the new stereo I
would like to own.
EXPLORING THE RELATIONSHIP EXPLORING THE RELATIONSHIP BETWEEN TWO VARIABLESBETWEEN TWO VARIABLES
Variable -- A measure of something that can take on different values.
EXPLORING THE RELATIONSHIP EXPLORING THE RELATIONSHIP BETWEEN TWO VARIABLESBETWEEN TWO VARIABLES
CETERIS PARABUS CETERIS PARABUS Other things being equal to what they Other things being equal to what they
were before:were before:Other variables remain fixed.Other variables remain fixed.
GRAPHINGGRAPHINGEconomists use this in a Economists use this in a
two dimensional form as a two dimensional form as a way of showing the way of showing the relationship between two relationship between two variables.variables.
YY
XX
variable 2variable 2
variable 1variable 15 10 15 20 25 30 35
1020304050607080
90100110120130140150160170
QUANTITY(HOURS WORKED)
QUANTITY
WEEKLYINCOME
$20 Weekly Allowance(No hours worked)
b
a
c
d
changein weeklyallowance
$15
BASIC GRAPHING
YY
XX
variable 2variable 2
variable 1variable 15 10 15 20 25 30 35
1020304050607080
90100110120130140150160170
QUANTITY(HOURS WORKED)
QUANTITY
WEEKLYINCOME
$20 Weekly Allowance(No hours worked)
b
a
c
d
changein weeklyallowance
$15
z
y
x
BASIC GRAPHING
Graphing allows us to think Graphing allows us to think in a marginal wayin a marginal way
Marginal - How much of a change Marginal - How much of a change occurs in one variable for a specific occurs in one variable for a specific incremental change in the other incremental change in the other variable.variable.
How much of a change occurs in How much of a change occurs in income for an additional hour income for an additional hour worked.worked.
Y
X
INCOME
HOURS WORKED
108
60
10 22
SHOWING THE SLOPE
SLOPESLOPE
Change in the vertical-axis variable for Change in the vertical-axis variable for a given change in the horizontal-axis a given change in the horizontal-axis variable.variable.
Change in income for a given change Change in income for a given change in hours worked.in hours worked.
Rise ÷RunRise ÷Run
Y
X
INCOME
HOURS WORKED
108
60
10 22
RUN
RISE
SHOWING THE SLOPE