Microeconomics

Economics 0105
Dr. McGahagan

Course web page:

http://www.pitt.edu/~upjecon

Textbook:

Principles of Microeconomics
by

Robert Frank and Benjamin Bernanke

(New York, McGraw Hill, 2000)
At the UPJ bookstore now

Scarcity ... the fundamental problem of economics

Resources are limited ... wants are not

White Sands, New Mexico in the1950s, during a water shortage

photo from National Park Service

Projected water scarcity

(R. Svadlenka, "The emerging water crisis")

Color codes:
Green => "little or no scarcity"
Red => "Physical water scarcity"
Orange => "Economic scarcity"

In economics, ALL COUNTRIES face economic scarcity

This photo illustrated an article on water scarcity on the

island of Corfu (Greece).
No physical scarcity of water ... but no USABLE water.
Scarcity is always relative to human wants, hence it is
always with us.

Is West Nile Virus Scarce?

In US in 2002 (to Aug.23) 371 cases, 16 deaths

http://www.cdc.gov/od/oc/media/wncount.htm

Scarcity means scarcity of goods;

West Nile Virus is rare, but not scarce

Resources are limited; wants are unlimited

Scarcity = not enough resources to produce the goods to satisfy
our wants.
Resources: Adam Smith in his Wealth of Nations (1776)
divided resources into land, labor and capital.

http://www.adamsmith.org/smith/won-intro.htm

Adam Smiths 3 resources: Land, Labor and Capital

1. LAND: used as shorthand for any natural resource,
not simply for agricultural land.
2. LABOR: manual power + skill ("human capital")
3. CAPITAL: produced means of production
for example, hammers, drill presses, computers ...
or even flint arrowheads of American Indians,
which Smith used as an example.
Although money is used to BUY all the above,
money is not itself a productive resource.
Capital grows through investment and requires
foregoing current consumption. The Indian must take time away
from gathering berries to make the arrowheads.

Identify the resources:

Buena Vista Farm, Kern County, CA, around 1885

(Library of Congress)

Identify the resources:

Barthelemy L'Anglais, Le Livre des Proprietes des Choses

15th century. Bibliotheque Nationale, France.

Identify the resources: land, labor, capital

Trawling for shrimp (NOAA website)

Identify the resources: land, labor, capital

Gathering coal from a slag heap, Nanty Glo, 1937

(Photo by Ben Shahn, Library of Congress website)

Identify the resources: land, labor, capital

Electric furnace, Allegheny Ludlum (1941)

Scarcity means that choices are

necessary.
When you cant have all you want of
everything, you must make choices.
Microeconomics is the study of how to make
the best possible ( or the optimal) choice
under the constraint of limited resources.

Choices always involve tradeoffs

Because of the scarcity of resources, we can have more
of one thing only if we are willing to do with less of
another.
The tradeoffs are very evident in wartime
the following slide shows Cadillacs from 1944 and
1946.
The productive resources in the lower pictures could be
used to make either tanks or cars.

Cadillacs ... 1944 and 1946

Opportunity cost of tank = 10 passenger autos

M5 Tank

Cadillac Coupe

Tradeoffs and the Production

Possibility Frontier
Economists would want to develop a more precise
model of the tradeoffs involved
And that model can be represented graphically by
a Production Possibility Frontier, showing the
choices which are
-- possible (on or within the frontier)
-- efficient (exactly on the frontier)
-- inefficient (within the frontier)
-- impossible (beyond the frontier)

M5 tanks

500

The tank-auto trade-off:

an economist's view using the
Production Possibility Frontier

Autos
5,000

M5 tanks

The tank-auto PPF:

one POSSIBLE point is
(2000 autos, 300 tanks)

500

is

300

another POSSIBLE point

(4000 autos, 100 tanks)

Autos
2,000

5,000

M5 tanks

500

The tank-auto PPF:

an IMPOSSIBLE point is
(4000 autos, 300 tanks)

300

Autos
4,000

5,000

M5 tanks

500

200

an INEFFICIENT point is
(1000 autos, 200 tanks)
1,000

Autos
5,000

M5 tanks

500

The tank-auto equation:

TANKS = 500 0.1 AUTOS
Check out a few values:
AUTOS
0
1000
2000
2001

TANKS
500
400
300
299.9

Autos
5,000

M5 tanks

Equation in general form:

TANKS = a + b AUTOS

500

How to find the equation from the graph:

1. a = Y-INTERCEPT = 500
2. b = SLOPE = rise over run
= - 500 divided by 5000 = - 0.1

Autos
5,000

M5 tanks

What the intercept means:

TANKS = 500 0.1 AUTOS

500

IF we produced zero autos, we could produce up to

500 tanks, since
TANKS = 500 0.1 (0) = 500

Autos
5,000

M5 tanks

600

What happens when the intercept changes:

TANKS = 600 0.1 AUTOS
IF we produced zero autos, we could produce up to
600 tanks, since
TANKS = 600 0.1 (0) = 600
The PPF would shift OUT and parallel to itself.

500
This might be due to an increase
in the resources available for
production for example, an
increase in the labor force, and a
new assembly line in the factory

Autos
5,000

6000

M5 tanks

500

What the slope means:

TANKS = 500 0.1 AUTOS
IF we were producing 2000 autos and 300 tanks
and if we decided to produce one more auto, we
would have to reduce tank production to 299.9
The OPPORTUNITY COST of an auto is
one-tenth of a tank.

Autos
5,000

M5 tanks

500

What happens when the slope changes:

TANKS = 500 0.05 AUTOS
If autos = 0, TANKS = 500
If autos = 5,000, TANKS = 250
If autos = 10,000, TANKS = 0

The possibility exists of producing more autos

perhaps some way of producing auto transmissions
(but NOT tank transmissions) more rapidly has
been discovered.

Autos
5000

10,000

Costs and benefits

The Production Possibility Frontier shows us
the economically efficient possibilities, but
does not help us choose among them.
To choose, we must weigh costs and benefits:
take an action (move along the PPF)
if and only if the EXTRA benefits of the
action are at least as great as the EXTRA
costs.

Scarcity and use of time

Exercise: Draw PPF for

1.Studying/Partying
2. Studying/Working
Think about intercepts,
actual point chosen.

Opportunity cost
Consider the last slide:
1. What is the opportunity cost of studying?
2. What is the opportunity cost of working?
3. Why do rational people make different choices?