principles of microeconomics - courses.modernstates.org · principles of microeconomics module 1.1...
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PrinciplesofMicroeconomicsModule1.1
Scarcity,LimitedResourcesandOpportunityCosts
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WhatisEconomics?
• Economicsisthestudyofhowpeopleandsocietyallocatescarceresources
• Scarceresources:• Forpeople:Time,Moneyect.• Forfirms:FactorsofProductionà Land,LaborandCapital
• Sincewedon’thaveaninfiniteamountofresources– whatdowedowithwhatwehave?
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TradeoffsinDecisions
• Peoplefacetradeoffsindecisionsbecauseofscarceresources• Cannotdoeverything,buyeverything,makeeverything• Needtochoosehowtoallocateourtime,ourmoney,ourresources
• Whenyoumakeonechoice– yougiveuptheotheroption
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OpportunityCosts
• OpportunityCost:Whatyougiveuptogetsomething• Example:Howmanytimescanyouhitthesnoozebutton?
Benefit Opportunity Cost
Hititonce MoreSleep Feelrushed inthemorning
Hitittwice MoreSleep Feel rushedSkipbreakfast
Hititthreetimes MoreSleep Feel rushedSkipbreakfastSkipthegym
Hititfourtimes MoreSleep Feel rushedSkipbreakfastSkipthegymLateforwork
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OpportunityCost
• OpportunityCostsaresubjectivetotheindividualandchangedependingoncircumstances
• WhatifitwasSaturdaymorningandyouhitthesnoozebutton?• Benefitsofmoresleepmayoutweighanycostsifyoudon’thavetowakeup!
• Whatifyouworkintheafternoon?• Youdonothavethesameconstraintsassomeonewhoneedstogotoworkinthemorning!
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OpportunityCosts
• OpportunityCostsdrivethedecisionswemakeeveryday• Wefacethemallthetime• Weweighthecostsandbenefitsofeachdecisionsconsciouslyorsubconsciouslyandmakeachoice
• Testyourself:Whatwasarecentdecisionyoumade?Whatdidyougiveupwhenyoumadethatchoice?Whatwastheopportunitycostforyou?
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PrinciplesofMicroeconomicsModule1.2
OpportunityCostsandProductionPossibilitiesFrontier
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ProductionPossibilitiesFrontierProductionpossibilitiesfrontier(PPF)representstheopportunitycostsaneconomyfacesintheproductionoftwogoods.
Alleconomieshavescarceresources-- needtodecidehowtoallocatethoseresourcestoproducegoods.
Ifyouproducemoreofonegood– needtoproducelessoftheother(withnochangeinavailableresources)
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PPFExerciseConsideraneconomythatproducestwogoods:Leatherjacketsandleatherboots.
• DrawthePPFcurveforthiseconomy• Aswemovefromonepointtothenext– calculatethechangeinthenumberofbootsproducedandthenumberofjacketsproduced.
• Whatdoesthistellyouabouthowopportunitycostschange?
A B C D E
Boots 0 20 40 60 80
Jackets 100 90 70 40 0
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PPFExerciseA B C D E
Boots 0 20 40 60 80Jackets 100 90 70 40 0ΔBoots +20 +20 +20 +20ΔJackets - 10 - 20 - 30 - 40
AswemovealongthePPFcurve:OpportunityCostchanges
• O.C.RISES asgiveupmoreofthegoodthatisSCARCE
• O.C.isLOWERwhenthegoodisinrelativeABUNDANCE
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PPFExercise
Supposenowthatthereisashortageinrubber.- Whathappensinthebootindustry?- Whathappensinthejacketindustry?
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PPFExerciseWithashortageinrubber,thisaffectstheproductionofbootsrelativelymorethantheproductionofjackets
BiasshiftofPPF
Ifthereisachangeinresources– needtoconsidertheimpactthishasonbothindustries– equalorbias?
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KeyTakeaway
• Alleconomicagentsfacetradeoffswhenmakingdecisions
• Whatevertheychoosecomeswithanopportunitycost– whattheycouldotherwisedowiththeirtime,money,resources
• ApplythisconcepttounderstandhowaneconomymakeschoicesbetweentheproductionofgoodsinthePPF
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PrinciplesofMicroeconomicsModule1.3
Comparativeadvantage,specialization,andtrade
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How can we satisfy our needs/wants?1.EconomicSelf-sufficiency:Produceallofthegoodsweneed/wanttoconsumeourselves
2.SpecializationandTrade: ProduceonegoodthatwehaveaComparativeAdvantageinandtradewithothersforwhatweneed
GAINSFROMTRADE:WecanCONSUMEMOREwhileworkingthesameamount.
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TradeExercise
• Who is better at producing bread?• Who is better at producing sweaters?• If they split their time evenly between producing both goods, how
much can they consume (no trade)?
AmountProducedinOneDayBread Sweaters
Seamstress 8loaves 4sweaters
Baker 24loaves 8sweaters
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Economic Self-Sufficiency
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OpeningtoTradeIfthebakerandseamstressdecidetotrade,theycanfocusonmakingonegoodandtradingitfortheother.
Howdoweknowwhomakeswhat?Needtodetermine:
ComparativeAdvantage
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Opening to TradeComparativeAdvantage
• Loweropportunitycost:ComparativeAdvantageinthatgoodOpportunityCosts:HowmuchofGoodAdowegiveuptomakeGoodB?
• Seamstresscanmake8bread(or)4sweaters inoneday
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AmountProducedinOneDay
OpportunityCost
Bread Sweaters Bread SweatersSeamstress 8loaves 4sweaters ½Sweater 2Breads
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Opening to TradeComparativeAdvantage
• Loweropportunitycost:ComparativeAdvantageinthatgoodOpportunityCosts:HowmuchofGoodAdowegiveuptomakeGoodB?
• Bakercanmake24bread(or)8sweatersinoneday
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AmountProducedinOneDay
OpportunityCost
Bread Sweaters Bread SweatersBaker 24loaves 8sweaters 1/3Sweater 3Breads
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Trade Exercise
Opportunity Costdeterminesspecialization
OpportunityCostTomake1Bread,
giveup:Tomake1Sweaters,
giveup:Seamstress ½Sweater 2Breads
Baker 1/3Sweater 3Breads
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Trade Exercise
Supposetheagentsagreethateachpersoncompletelyspecializes:
Produceonlytheproductinwhichtheyhaveacomparativeadvantage
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Trade Exercise
AMOUNT PRODUCEDBread Sweaters
Seamstress 0 4 sweaters
Baker 24 bread 0
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Trade Exercise
AMOUNTPRODUCEDBread Sweaters
Seamstress 0 4sweaters
Baker 24bread 0
Whatiftheytrade2sweatersfor5bread?
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Trade Exercise
AMOUNTCONSUMED
Bread Sweaters
Seamstress 0bread+5bread=5bread
4sweaters– 2sweaters=2sweaters
Baker 24bread- 5bread=19bread
0sweaters+2sweaters=2sweaters
Trade:2sweatersfor5bread
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Trade Exercise
AMOUNTCONSUMED
Bread Sweaters
Seamstress 0bread+5bread=5bread
4sweaters– 2sweaters=2sweaters
Baker 24bread- 5bread=19bread
0sweaters+2sweaters=2sweaters
Trade:2sweatersfor5bread
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Trade Exercise
AMOUNTCONSUMED
Bread Sweaters
Seamstress 0bread+5bread=5bread
4sweaters– 2sweaters=2sweaters
Baker 24bread- 5bread=19bread
0sweaters+2sweaters=2sweaters
Trade:2sweatersfor5bread
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Trade Exercise
AMOUNTCONSUMED
Bread Sweaters
Seamstress 0bread+5bread=5bread
4sweaters– 2sweaters=2sweaters
Baker 24bread- 5bread=19bread
0sweaters+2sweaters=2sweaters
Trade:2sweatersfor5bread
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Trade Exercise
AMOUNTCONSUMED
Bread Sweaters
Seamstress 5bread 2sweaters
Baker 19bread 2sweaters
Trade:2sweatersfor5bread
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With Trade
18
2
19ConsumptionWithTrade
5ConsumptionWithTrade
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Comparative AdvantageAgent with the lower opportunity cost in
producing the good will have a comparative advantage in its production
• Nosingleagentcanhaveacomparativeadvantageinbothgoods.
• Aslongastheopportunitycostsbetweentwoagentsdiffer– bothcangainfromtrade.
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Key Takeaway• Trade and specialization make everyone better off because –
consume more without working more
• Trade can be beneficial even when one economic agent is much better at producing both goods
• To determine which goods an economic agent will produce –need to understand comparative advantage (or) opportunity cost in producing each good
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PrinciplesofMicroeconomicsModule1.4(A)
EconomicSystems
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EconomicSystems
• Economicsystemsaresystemsof• Production• ResourceAllocation• Exchange• Distributionofgoodsandservices
1. Whattoproduce?2. Howmuchtoproduce?3. Whoreceivestheoutput?
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PropertyRightsandEconomicSystems
• Propertyrightsareanimportantcomponentofeconomicsystems• Becauseaneconomyistryingtoanswerthepreviousthreequestions-à whoownswhatinfluencesthetypeofsystemwehave
• PropertyRights– determinewhoownsaresourceandwhodecideshowitisused.
• Individuals• Associations• Government
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PropertyRightsandEconomicSystems
• Propertyrightsareanimportantcomponentofeconomicsystems• Becauseaneconomyistryingtoanswerthepreviousthreequestions-à whoownswhatinfluencesthetypeofsystemwehave
• PropertyRights– determinewhoownsaresourceandwhodecideshowitisused.
• Individuals• Associations• Government
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PropertyRightsandEconomicSystems
• Propertyrightsareanimportantcomponentofeconomicsystems• Becauseaneconomyistryingtoanswerthepreviousthreequestions-à whoownswhatinfluencesthetypeofsystemwehave
• PropertyRights determinewhoownsaresourceandwhodecideshowitisused.
• Individuals• Associations• Government
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FourComponentsofPropertyRights
1. Therighttousethegood2. Therighttoearnincomefromthegood3. Therighttotransferthegoodtoothers4. Therighttoenforcepropertyrights
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EconomicSystems
Allocation
OWNERSHIP
Planned Private
Planned SocialistPlannedEconomy
CommandCapitalism
Private MarketSocialism Capitalism
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Market-basedEconomy
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PrinciplesofMicroeconomicsModule1.4(B)
MarginalAnalysis
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• Inthisvideowewilldiscussmarginalanalysisandhowchangesinincentiveswillchangedecisionsoffirmsandconsumers
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MarginalAnalysis• Marginalanalysis:examinationoftheassociatedcostsandpotentialbenefits ofspecificbusinessactivitiesorfinancialdecisions.
• Goal:todetermineifthecostsassociatedwiththechangeinactivitywillresultinabenefitthatissufficientenoughtooffsetthem.
• Insteadoffocusingonbusinessoutputasawhole,theimpactonthecostofproducinganindividualunitismostoftenobservedasapointofcomparison.
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MarginalAnalysis• Marginalanalysis:examinationoftheassociatedcostsandpotentialbenefitsofspecificbusinessactivitiesorfinancialdecisions.
• Goal:todetermineifthecosts associatedwiththechangeinactivitywillresultinabenefitthatissufficientenoughtooffsetthem.
• Insteadoffocusingonbusinessoutputasawhole,theimpactonthecostofproducinganindividualunitismostoftenobservedasapointofcomparison.
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MarginalAnalysis• Marginalanalysis:examinationoftheassociatedcostsandpotentialbenefitsofspecificbusinessactivitiesorfinancialdecisions.
• Goal:todetermineifthecostsassociatedwiththechangeinactivitywillresultinabenefitthatissufficientenoughtooffsetthem.
• Insteadoffocusingonbusinessoutputasawhole,theimpactonthecostofproducinganindividualunitismostoftenobservedasthebestpointofcomparison.
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ExampleofMarginalAnalysis• Amanufacturerwishestoexpanditsproduction• A marginalanalysisofthecostsandbenefitsisnecessary.
COSTS BENEFITS
Additionalmanufacturingequipment Estimatedincreaseinsalesattributedtotheadditionalproduction
Additional employeesforincreasedoutput
Larger orNewFacilities
Additionalmaterialsforproduction
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ExampleofMarginalAnalysis• Iftheincreaseinincome>theincreaseincost,theexpansionmaybeawiseinvestment
COSTS BENEFITS
Additionalmanufacturingequipment Estimatedincreaseinsalesattributedtotheadditionalproduction
Additional employeesforincreasedoutput
Larger orNewFacilities
Additionalmaterialsforproduction
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Incentives
• Peoplefacetrade-offsintheeverydecisionsthattheymake• Weighthecosts/benefitsassociatedwiththeirchoices• Choosewhatfitstheirneeds/wantsbest
• Incentiveschangecosts/benefitsofadecision• Becausetheyalterthecostsorbenefitsofdoingsomething– theymaychangethechoiceapersonmakes
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ExamplesofIncentivesandDisincentives
INCENTIVES DISINCENTIVES
Retailstoresales:Buy-one get-onesales
Taxesoncigarettes,alcohol ect.
Attendance policiesinclass Calorie reportsatfast-food restaurants
Taxsubsidy fornewgreentechnology Pollution tax
![Page 52: Principles of Microeconomics - courses.modernstates.org · Principles of Microeconomics Module 1.1 Scarcity, Limited Resources and Opportunity Costs. What is Economics? • Economics](https://reader031.vdocuments.net/reader031/viewer/2022021821/5b05c6c17f8b9ac33f8bd891/html5/thumbnails/52.jpg)
ExamplesofIncentivesandDisincentives
INCENTIVES DISINCENTIVES
Retailstoresales:Buy-one get-onesales
Taxesoncigarettes,alcohol ect.
Attendance policiesinclass Calorie reportsatfast-food restaurants
Taxsubsidy fornewgreentechnology Pollution tax
![Page 53: Principles of Microeconomics - courses.modernstates.org · Principles of Microeconomics Module 1.1 Scarcity, Limited Resources and Opportunity Costs. What is Economics? • Economics](https://reader031.vdocuments.net/reader031/viewer/2022021821/5b05c6c17f8b9ac33f8bd891/html5/thumbnails/53.jpg)
KeyTakeaways
• Marginalanalysisisusedfrequentlybyfirmstoweighthebenefitsanddrawbacksofbusinessdecisions
• Peopledothistoo!Theyweighthecostsandbenefitsofvariousdecisionsandmakeachoice
• Incentives/disincentiveschangethecostsorbenefitsofachoice,thereforemayalterthedecisionsomeonemakes