Understanding EconomicsUnderstanding Economics

Introduction: The Economic ProblemIntroduction: The Economic Problem

The Economic ProblemThe Economic ProblemHow is being here today an example of economic opportunity cost(s)?.....

What is the marginal utility of getting a diploma/degree? MA? Ph.D?...

Economics Defined:Economics Defined:

Economics is the social study of how to Economics is the social study of how to distribute scarce resources among distribute scarce resources among competing ends.competing ends.

From yesterday’s intro: From yesterday’s intro: -Microeconomics Microeconomics focuses on individual consumers focuses on individual consumers and businesses.and businesses.-MacroeconomicsMacroeconomics takes a broad view of the economy. takes a broad view of the economy.

The Economic ProblemThe Economic Problem

Economic agents must continually Economic agents must continually make choices.make choices.-Their wants are unlimited.-They face a limited supply of economic resources.

Economic Choice:Economic Choice: Economists assume that economic Economists assume that economic

decision-makers maximize their own decision-makers maximize their own utilityutility..

- Decision-makers must keep in mind the Decision-makers must keep in mind the opportunity cost opportunity cost of each alternative.of each alternative.

- Opportunity cost is defined as the utility Opportunity cost is defined as the utility of the best forgone alternativeof the best forgone alternative.

The Production Possibilities FrontierThe Production Possibilities Frontier

The production possibilities model is The production possibilities model is based on three assumptions:based on three assumptions:

- ……an economy makes only an economy makes only twotwo products products- ……resources and technology are resources and technology are fixedfixed- ……all resources are employed to their all resources are employed to their

fullest capacityfullest capacity

The Production Possibilities FrontierThe Production Possibilities Frontier

Production Possibilities Frontier

Hamburgers Computers Pt. on Graph

Production Possibilities Curve

0 1 2 3

1000

600

b

c10001000 00 aa

900900 11 bb

600600 22 cc

00 33 dd Computers

Ham

bur

gers

e

f

inefficient

unattainable

d

900

a

The Law of Increasing CostsThe Law of Increasing Costs

Production Possibilities CurveProduction Possibilities Curve

0 1 2 3

1000

600

ComputersComputersH

ambu

rger

sH

ambu

rger

s

As the quantityAs the quantityof computersof computers

rises, so does theirrises, so does theiropportunity cost.opportunity cost.

a

b900

c

d

Production Possibilities Frontier

Hamburgers Computers Pt. on Graph

10001000 00 aa

900900 11 bb

600600 22 cc

00 33 dd

Opportunity Cost per additional unit?Opportunity Cost per additional unit?

Shifts in Production PossibilitiesShifts in Production Possibilities

Production Possibilities Curve

0 3

1000

Computers

Ham

bur

gers

With morecomputers, the curve shifts outin the nextperiod.

The Founder of Modern EconomicsThe Founder of Modern Economics

Adam Smith:Adam Smith:-Explained how the division of labour increases Explained how the division of labour increases production…production…-Argued that self interest is transformed by the Argued that self interest is transformed by the invisible hand of competition so that it creates invisible hand of competition so that it creates significant economic benefits …significant economic benefits …-Stressed the principle of Stressed the principle of laissez fairelaissez faire, which , which means that governments should not intervene in means that governments should not intervene in economic activityeconomic activity