These are the lecture slides for the Chapter 1, Microeconomics by McConnel and Brue, Lecture notes of Microeconomics

Download These are the lecture slides for the Chapter 1, Microeconomics by McConnel and Brue and more Lecture notes Microeconomics in PDF only on Docsity! Mc Connell and Brue Introduction to Economics and the Economy Chapter 01 Limits alternatives and Choices Prof. Dr. Musarrat Adnan Learning Objectives  Define economics and the features of the economic perspective  Describe the role of economic theory in economics.  Distinguish microeconomics from macroeconomics and positive economics from normative economics.  Explain the individual’s economizing problem and how trade-offs, opportunity costs, and attainable combinations can be illustrated with budget lines.  List the categories of scarce resources and delineate the nature of society’s economizing problem The Economic Perspective Economists view things from a unique perspective. This economic perspective, or economic way of thinking, has several critical and closely interrelated features. The Economic Perspective Scarcity and Choice The economic resources needed to make goods and services are in limited supply. This scarcity restricts options and demands choices. Because we “can’t have it all,” we must decide what we will have and what we must forgo The Economic Perspective Opportunity Cost Economists call such sacrifices opportunity costs: To obtain more of one thing, society forgoes the opportunity of getting the next best thing that could have been created with those resources. That sacrifice is the opportunity cost of the choice. Comparing Marginal Benefit and Marginal Cost. MB ˃ MC MB ˂ MC MB = MC Big Economic Questions What is to be produced How is to be produced  For whom to be produced Theories, Principles, and Models The scientific method:  observe the world Theories, Principles, and Models Economic Principle A very well-tested and widely accepted theory is referred to as an economic law or an economic principle Theories, Principles, and Models Generalizations: Economic principles are generalizations relating to economic behavior or to the economy itself. Economic principles are expressed as the tendencies of typical or average consumers, workers, or business firms. Theories, Principles, and Models Other-things-equal assumption: In constructing their theories, economists use the ceteris paribus or other-things-equal assumption— the assumption that factors other than those being considered do not change. They assume that all variables except those under immediate consideration are held constant for a particular analysis. Microeconomics and Macroeconomics – Microeconomics is the study of choices made by individuals and businesses, and the influence of government on those choices. – Macroeconomics is the study of the effects on the national and global economy of the choices that individuals, businesses, and governments make. Positive & Normative Economics POSITIVE STATEMENTS.…  based upon facts — without value judgments “what is” NORMATIVE STATEMENTS…  based upon subjective beliefs — “what ought to be” Individual’s Economizing Problem  Limited Income Unlimited Wants A Budget Line Individual’s Economizing Problem Budget Line Trade-Offs and Opportunity Costs. The budget line illustrates the idea of trade- offs arising from limited income. To obtain more movies, you have to give up some books. Individual’s Economizing Problem Budget Line Choice: Limited income forces people to choose what to buy and what to forgo to fulfill wants. You will select the combination of movies and paperback books that you think is “best.” That is, you will evaluate your marginal benefits and marginal costs (here, product price) to make choices that maximize your satisfaction. Individual’s Economizing Problem Budget Line Income Changes. The location of the budget line varies with money income. An increase in money income shifts the budget line to the right; a decrease in money income shifts it to the left. Shifts their budget lines outward enables them to buy more goods and services. But even with more income, people will still face spending trade-offs, choices, and opportunity costs. Society’s Economizing Problem Scarce Resources. Resource Categories: Economists classify economic resources into four general categories Land Labour Capital Entrepreneur Society’s Economizing Problem  Land. Land means much more to the economist than it does to most people. To the economist land includes all natural resources (“gifts of nature”) used in the production process. These include forests, mineral and oil deposits, water resources, wind power, sunlight, etc. Society’s Economizing Problem Labor. The resource labor consists of the physical actions and mental activities that people contribute to the production of goods and services. Capital For economists, capital (or capital goods) includes all manufactured aids used in producing consumer goods and services. Included are all factory, storage, transportation, and distribution facilities, as well as tools and machinery. Economists use the term investment to describe spending that pays for the production and accumulation of capital goods. Society’s Economizing Problem  The entrepreneur makes the strategic business decisions and set the business Enterprise  The entrepreneur innovates.  The entrepreneur bears risk.  Because land, labor, capital, and entrepreneurial ability are combined to produce goods and services, they are called the factors of production, or simply “inputs.” Production Possibilities Model Assumptions Full employment The economy is employing all of its available resources. Fixed resources The quantity and quality of the factors of production are fixed. Fixed technology The state of technology (the methods used to produce output) is constant. Production Possibilities Model Two goods The economy is producing only two goods: pizzas and industrial robots. Pizzas symbolize consumer goods, products that satisfy our wants directly; industrial robots (for example, the kind used to weld automobile frames) symbolize capital goods, products that satisfy our wants indirectly by making possible more efficient production of consumer goods. Production Possibilities Curve Q Q R ob ot s (th ou sa nd s) Pizzas (hundred thousands) 10 9 8 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8 A B C D E attainable but inefficient W Unattainable Attainable and efficient R ob ot s (th ou sa nd s) Production Possibilities Curve Production Possibilities Curve displays the different combinations of goods and services that society can produce in a fully employed economy, assuming a fixed availability of supplies of resources and fixed technology Production Possibilities Curve  The production possibilities curve (frontier) marks the boundary between attainable & unattainable production levels  Points on the curve are attainable & efficient  Points above the curve are unattainable  Points below the curve are attainable & inefficient Opinnal Allocation Of RESOUrces 10 Marginal benefit and marginal cost o 100,000 200.000 300,000 Quantity of pizza Optimal Output: MB = MC Optimal Output Achieving the optimal output requires the expansion of a good’s output until its marginal benefit (MB) and marginal cost (MC) are equal. No resources beyond that point should be allocated to the product. Here, optimal output occurs at point e, where 200,000 units of pizzas are produced. Unemployment, Growth & the Future Relationship of Production Possibility curve and Unemployment, Growth and the Future Economic Growth A rightward shift of the production possibilities curve caused by.... 1. Increases in resource supplies 2. Advances in technology A Growing Economy Economic GrowthQ Q Pizzas (hundred thousands) 14 13 12 11 10 9 8 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8 A’ B’ C’ D’ E’ R ob ot s (th ou sa nd s) A Growing Economy Two Examples of Economic Growth Goods for the Present Goods for the Present G oo ds fo r t he F ut ur e G oo ds fo r t he F ut ur e Favouring Present goods Favouring Future goods Future Curve Future Curve Pitfalls to Sound Economic Reasoning Fallacy of Composition what is true for one individual or part of a whole is necessarily true for a group of individuals or the whole. Pitfalls to Sound Economic Reasoning Causation Fallacies Post Hoc Fallacy Because event A precedes event B, means A is the cause of B. Correlation but Not Causation Correlation between two events or two sets of data indicates only that they are associated in some systematic way but not causing each other in either one way or both ways. Quick Questions If you initially have $100 to spend on books or movie tickets. Price of book $25 each and price movie tickets $10 each. For each of the following situations, would the attainable set of combinations that you can afford increase or decrease?. a. Your budget increases from $100 to $150 while the prices stay the same. b. Your budget remains $100, the price of books remains $25, but the price of movie tickets rises to $20. c. Your budget remains $100, the price of movie tickets remains $10, but the price of a book falls to $15 Quick Questions 1. Draw Production possibility curve. 2. Draw new PPC if: i. Improvement occurs in the technology of producing forklifts. ii. A technological advance occurs in producing automobiles but not in producing forklifts. @uiek @)fssiloas Exam score (points) b mi to a a a hd Oo oO Z 4 6 & 10 Study time (hours) Construct the table and find the slope Quick Questions Find the slope of the curve at point ‘A’, ‘B’ and ‘C”