ECO 120

ECONOMICS Introduction to Economics

Lecture 1

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ECONOMICS
Economics is the study of how people choose to use their resources in attempts to satisfy their unlimited wants As individuals we have limited time and spending power As individuals and societies we are faced with limited resources and virtually unlimited wants Economists study the choices we make and also the consequences of these choices

MICROECONOMICS vs MACROECONOMICS
MICROECONOMICS

The study of the choices made by households, firms and government and how these choices affect the markets for goods and services

MACROECONOMICS

The study of the nations economy as a whole. Eg: economic growth, inflation, unemployment

Economic Resources
people or things that possess the ability to help produce commodities (goods & services) that people value.

land
rent

Resource Suppliers

labor wages capital

Producers of Goods

interest entrepreneur
profit

SCARCITY
Scarcity is a situation in which resources are limited in quantity and can be used in different ways. Peoples wants are greater than the economys ability to produce desirable goods & services Because our resources are limited, we must sacrifice one thing for another.

Scarcity CHOICES

Opportunity Cost
THE OPPORTUNITY COST of an action is the next best foregone alternative.

Production Possibility Curve

Production Possibility Curve (PPC) or Production Possibility Frontier (PPF) is a curve shows the maximum output of 2 goods or services that society can produce with existing resources and level of technology

Assumptions
To draw PPC, we need 4 assumption: Producing 2 goods Fixed resources Fixed technology Producing at full employment

FIGURE 1-1: Production Possibility At point A, society can Frontier produce 10 units of good
Good Y

11
10

Y & 3 units of good X At B, can produce 4 unit of good Y and 12 unit of good X.

D C

Without more resources, points outside PPC are unattainable

B

Points inside the PPC are inefficient.

12

13

Good X

PPC - Example
Production Possibilities
Food Clothing
0 1 2 3 4 5 15 14 12 9 5 0
f 1 2 3 4 5 food 5 e 9 d clothing 15 14 12 a b c Figure 1

Scarcity and Opportunity Costs

Opportunity cost: Cost of a good as measured by goods or services that could have been produced using those scarce resources

FIGURE 1-2: Production Possibility Frontier

Good Y

Opportunity cost of good X = 1 unit of good Y

10 9 A

3 4

Good X

FIGURE 1-3: Production Possibility Frontier

Good Y

Opportunity cost of Good X = 2 unit of Good Y 4 B

2
Good X 0 1213

FIGURE 1-4: Production Possibility opp cost of good X rises so Frontier that it is much higher at
Good Y

point B (1 unit of good X costs 2 unit of good Y).

Opportunity cost of Good X = 1 unit of good Y

10 9

Opportunity costs of economic action not constant, but vary along PPF

Opportunity cost of Good X = 2 unit of good Y

2
Good X 0 3 4 1213

Production Possibilities Curve

Increasing Opportunity Cost
50

Production of Clothing

45 40 35 30 25 20 15 10 5 0 0 5 10 15 20 25 30

As you increase production of food you sacrifice increasing quantities of clothing

35

40

45

50

Production of Food

Combination of goods

Radios (R) (unit)

Televisions Opp. cost of (TV) (unit) radio (Total)

Opp. cost of radio (per unit)

A
B C D E

0
4 7 9 10

10
9 7 4 0

1 TV 2 TV 3 TV 4 TV

= 0.25 TV 2/3 = 0.67 TV 3/2 = 1.5 TV 4/1 = 4 TV

Increasing opp. cost

Combination of goods A B C D

Radios (R) (unit) 0 2 4 6

Televisions (TV) (unit) 12 10 8 6

Opp. cost of radio (Total) 2 TV 2 TV 2 TV

Opp. cost of radio (per unit) 2/2 = 1 TV 2/2 = 1 TV 2/2 = 1 TV

E
F g

8
10 12

4
2 0

2 TV
2 TV 2 TV

2/2 = 1 TV
2/2 = 1 TV 2/2 = 1 TV

Constant opp. cost

Insights from the PPF model

u Scarcity - The quantities of the goods that can be produced fall short of what is desired . u Choice - combinations of goods among which society must choose. u Opportunity cost - When there is efficiency in production, the only way to have more of one good is to have less of another.

Economic Growth
Good Y

Why would the PPF shift outward? -- more resources: land, labor, capital, and human capital -- technological progress

Initial PPF

Good X

Production Possibilities Curve

Increase in Resources or Technology
Production of Clothing
70 60 50 40 30 20 10 0 0 10 20 30 40 50 60 70

Improvement that benefits both products. PPC shifts outward (to the right), from PPC1 to PPC2.
PPC1 PPC
2

Production of Food

Production Possibilities Curve

Production of Clothing
60 50 40 30 20 10 0 0 10 20 30 40 50 60 70

Improvement that benefits Food production only.

PPC1

PPC
2

Production of Food

Production Possibilities Curve

Production of Clothing
70 60 50 40 30 20 10 0 0 10 20 30 40 50 60 70

Improvement that benefits clothing production only.

PPC1 PPC
2

Production of Food

Alternative PPFs
Good Y

Increasing Opportunity Costs

Constant Opportunity Costs

Decreasing Opportunity Costs

Good X

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) For whom to produce? Target group (rich, poor, working people, etc)

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