CHAPTER 2 THE ECONOMIC PROBLEM: SCARCITY AND CHOICE

Transcription

1 CHAPTER 2 THE ECONOMIC PROBLEM: SCARCITY AND CHOICE

2 2.1 Three basic questions EX: American Airline It uses runways land pilots and mechanics labor <= Resources airplanes capital to produce transportation services <= producers for households

3 2.2 Scarcity and opportunity cost Scarcity EX 1 I want to buy an island, but I only make $1,000 a month => constraint is money EX 2 If I spend one hour studying for an economic exam, I have one less hour to spend studying for a math exam or going to the movies. Should I study economics or math or watch movies? => constraint is time

4 2.2 Scarcity and opportunity cost Scarcity EX 3 if BMW devotes some of the scarce workers and machines in producing Z4 roadsters, those resources will not be available to produce more SUVs. Should BMW produce Z4 or SUV? => constraint is labor

5 2.2 Scarcity and opportunity cost Opportunity cost EX1: the O.C. of going to college for a year tuition books and fees forgone wages

6 2.2 Scarcity and opportunity cost Opportunity cost EX2: the O.C. of seeing a movie the price of the ticket the value of the time you spend in the theater

7 2.2 Scarcity and opportunity cost Opportunity cost EX3: the O.C. of going to a basketball game may be the five or ten extra points you might have earned on an exam by staying home and studying that night

8 2.3 One-person economy Story: Robinson Crusoe in an island

9 2.3 One-Person Economy Resource time (24 hours) Allocation:10 hours for production, 4 hours for lying on beach, 8 hours for sleep fish bird Catch per hour 10 5

10 2.3.1 Production Possibilities Frontier O.C. is constant 1) Production Possibilities Frontier (PPF): a graph showing the maximal different combinations of output for a given amount of inputs More of one good Less of another It illustrates opportunity costs in production (the slope)

11 2.3.1 Production Possibilities Frontier- O.C. is constant Efficiency = no waster Production efficiency: all available resources are utilized Cannot produce more of one good without decreasing production of another good

12 2.3.1 Production Possibilities Frontier- O.C. is constant Any point inside the PPF is a point where we re wasting resources Any point on the PPF is a point of efficiency Any point outside the PPF is a point you might love to be at, but it s at a point that s unattainable

13 2.3.2 Production Possibilities Frontier O.C. is not constant Story change: it gets harder and harder to catch fish Questions: What does this imply about the opportunity cost of fishing? What does this imply about the shape of the PPF

14 2.3.2 Production Possibilities Frontier O.C. is not constant In reality, we have increasing marginal opportunity costs It means the more resources already devoted to an activity, the smaller the payoff to devote the additional resources to that activity.

15 2.4 Two-Person Economy Data: 10 hours for production Birds (per hour) Fish (per hour) Robinson 5 10 Peter 2 8 Robinson s O.C. Peter s O.C. One fish 1/2 bird 1/4 bird One bird 2 fish 4 fish

16 2.4 Two-Person Economy If Peter trade 50 units of fish for 18 units of birds, then,

17 2.4 Two-Person Economy Principle of comparative economics: specialize good with the lowest opportunity cost of production It is developed by David Ricardo ( )

18 Two-Person Economy Comparative advantage is the basis for exchange Comparative advantage specialization Specialization requires exchange Trading leads to increased production because it permits specialization

19 2.4 Two-Person Economy All nations would be better off as more total output could be produced and living standards would increase It s the difference in comparative advantage that leads to specialization. Then, we have exchange and have trade and market

20 Economic Systems Command economy (centrally planned economy): Central authority, or planner, directs all economic decisions Problem 1: government decisions are made by people who may act in their own self- interest. Problem 2: they don t know market much

21 Economic Systems Free-Market Economy (lasses-faire economy): People and firms are Free to Choose all activities Problem1: they do not always produce what people want at the lowest cost there are inefficiencies, like monopoly Problem 2: income may be unfairly distributed Problem 3: unemployment and inflation recur

22 Economic Systems Mixed economy: hybrid of the two systems. Government plays a role (to varying degrees) in economic decisions. All real-world economies are mixed, with differing degrees of government intervention. Government sets and enforces the rules for an economy The protection of private property The enforcement of laws governing intellectual property

23 Have a Nice Weekend!