econ 201 lecture 2.4 essential concepts and terms 1-15-2009
TRANSCRIPT
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Econ 201Lecture 2.4
Essential Concepts and Terms
1-15-2009
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Defining Economics
• Economics studies (Wikipedia): – 1) the production,– 2) distribution, and – 3) consumption of goods and services.
• The term economics comes from the Greek for oikos (house) and nomos (custom or law), hence "rules of the house(hold).“
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Production of Goods and Services
• How do we decide which goods and services get produced? – How much is produced?– Who/which firms produce it?– Which resources are used to produce it?
• A couple of approaches:– Decentralized – Adam Smith’s invisible hand
• Market demand determines which goods (and how much) gets produced
– Centralized – planned economy• Government planners determine production
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Distribution of Goods and Services
• How are the goods and services distributed?– To which consumers?– How much to each consumer?
• A couple of approaches– Decentralized: goods are allocated to consumers
based on their willingness-to-pay– Centralized: allocated or rationed to consumers
• WW II: rationing food/clothing by coupons
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Another Way of Looking At It
• Lionel Robbins (1932): • "the science which studies human behaviour as
a relationship between ends and scarce means which have alternative uses."
• Scarcity means that available resources are insufficient to satisfy all wants and needs.
• Absent scarcity and alternative uses of available resources, there is no economic problem. The subject thus defined involves the study of choices as they are affected by incentives and resources.
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Scarcity
• There are not enough resources to produce and consume all of the goods and services we desire– An example: production possibilities frontier
(PPF)• Federal Government: guns and butter (or child
health care and the Iraq war)• Detroit: SUVs/Humvees and smaller/fuel-efficient
cars
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Production Possibilities Frontier
• Tradeoff between producing computers and food in a
two good economy
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Paul’s example
• Two brewers• Two beers: Stout or Lager
– What is the opportunity cost?• “Next” best alternative
Brewer Gal of
Stout
Gal of Lager
Opp Cost of Stout
Opp Cost of Lager
Jones 5 10
Brown 4 3
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Opportunity Cost
• Jones– Can produce either:
• 5 gals of stout or 10 gals of lager– Or any “linear” combination in between
• What is the cost of producing 1 more gal of stout– Start at 0 gal of stout & 10 gal of lager– Next: produce 1 gal of stout -> can only produce 8 gal of
lager -> had to give up 2 gal of stout to produce 1 more gal of lager: opp cost of 1 more g of stout = 2 gal of lager
• Or alternatively– Cost of producing 1 gal of lager = ½ gal of stout
» (8->10 g lager) -> (1->0 g of stout)
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Paul’s example
• Two brewers• Two beers: Stout or Lager
– What is the opportunity cost?• “Next” best alternative
Brewer Gal of
Stout
Gal of Lager
Opp Cost of Stout
Opp Cost of Lager
Jones 5 10 2 g lager ½ g stout
Brown 4 3 ¾ g lager 4/3 g stout
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Gains From Trade
Wealth through Exchange
0
2
4
6
8
10
12
14
1 2 3 4 5 6
Gallo
ns o
f Bee
r Pro
duce
d
Scenario
Jones Lager
Stout
Brown Lager
Both Stout
Both Lager
Both
Stout Lager
8 0
8 2
6 4.75
4 7.5
2 10.25
0 13
Jones Brown
Lager Stout Lager
0 5 0
2 4 0
4 3 0.75
6 2 1.5
8 1 2.25
10 0 3
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PPF for Stout and LagerIndividually
PPF for Jones and Brown
0
2
4
6
8
10
12
5 4 3 2 1 0
Gals of Lager Produced
Ga
llo
ns
of
Sto
ut
Pro
du
ce
d
Jones
Brown
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The Combined PPFGains from Trade
Jones Brown Both
Lager Stout Lager Stout Lager
0 5 0
2 4 0 8 2
4 3 0.75 6 4.75
6 2 1.5 4 7.5
8 1 2.25 2 10.25
10 0 3 0 13