ECO 120 Principles of Economics

CHAPTER 1 Introduction to Economics

What is Economics?
Economists study the choices we make and also the consequences of these choices

Economics

Study of how people use their limited resources to fulfill unlimited wants and need.

Microeconomi cs study of individual

economic unit.

Macroecono mics studies the aggregate

behavior economy of the entire

Economic Concepts
Scarcity
scarce impossible to satisfy our unlimited wants limited resources wants always exceeding limited resources Peoples wants are greater than the economys ability to produce desirable goods & services Because our resources are limited, we must SCARCITY CHOICES sacrifice one thing for another.

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.

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 employment

full

FIGURE 1-1: Production Possibility Frontier

CLOTHES 20 19 18 A B choices

E
scarcity C

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)

D
9

Opportunity

Points inside the 14 15 POTATOES PPC are inefficient waste of resources Movement from one (Point D). another point to

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
Productio n Possibiliti Food Clothing es 0 15
1 2 3 4 5 14 12 9 5 0
1 2 3 4 5 e c loth ing 15 14 12 9 a b c d Fig u re 1

f 5 fo o d

Production Possibility Curve

Good Y Opportunity cost of Good X = 1 unit of good Y 10 9 A

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 Opportunity cost of along PPC
Good X = 2 unit of good Y

4 2

3 4

12 13

Good X

Combinatio Radios (R) Televisions Opp. cost of Opp. cost of n of goods (unit) (TV) (unit) radio radio (Total) (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

Combinatio Radios (R) n of goods (unit) A B C D E F g 0 2 4 6 8 10 12

Televisions Opp. cost of Opp. cost of (TV) (unit) radio radio (Total) (per unit) 12 10 8 6 4 2 0 2 TV 2 TV 2 TV 2 TV 2 TV 2 TV 2/2 = 1 TV 2/2 = 1 TV 2/2 = 1 TV 2/2 = 1 TV 2/2 = 1 TV 2/2 = 1 TV

Constant opp. cost

Shift of PPC
- PPC depends on the availability of the factors of production (resources) and technology.
Good X

Increase Decrease

Good Y

Why would the PPF shift outward? -- more resources: land, labor, capital, and human capital (economic growth) -- technological progress -- larger population
Good Y

New PPF

Initial PPF

Good X

Increase in Resources or Technology

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

Production Possibilities Curve

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

PPC1

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 from PPC1 to PPC2

PPC1

PPC2

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 from PPC1 to PPC2

PPC2 PPC1

Production of Food

Shape of The 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) The cheapest method of production minimum cost of production For whom to produce? Target group (rich, poor, working people, etc)