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Week 2
Week 2
Week 2
Introducing Economics
What do
Economists Study?
WHAT DO ECONOMISTS STUDY?
Scarcity
• All economic questions arise because
we are unable to satisfy all our wants—
because we face scarcity.
• Microeconomics environment:
• Macroeconomics environment
Macroeconomics is the study of the effects on
the national and global economy of the choices
that individuals, businesses, and governments
make.
Macroeconomic issues
Microeconomic Tradeoffs
The three microeconomic questions become
sharper when we think in terms of tradeoffs.
Microeconomic Tradeoffs
“How?” Tradeoffs arise when businesses
choose among alternative production
technologies.
Opportunity Cost
MB > MC do more
MC > MB do less
If marginal cost exceeds marginal benefit, people have an incentive
to do less of that activity.
Economists seek to predict choices by looking at changes in
incentives.
Economics: A Social Science
Model Building
Testing Models
An economic theory is a generalization that
summarizes what we think we understand
about the economic choices that people
make and the performance of industries and
entire economics.
Production Possibilities
Frontier
This Figure shows the
PPF for “guns” and
“butter,” which stand
for any pair of goods
and services.
Production Possibilities and Opportunity Cost
Production Efficiency
We achieve production
efficiency if we cannot
produce more of one
good without
producing less of
some other good.
Points on the frontier
are efficient.
Production Possibilities and Opportunity Cost
At such a point it is
possible to produce
more of one good
without producing less
of the other good.
At Z, resources are
either unemployed or
misallocated.
Production Possibilities and Tradeoff
Opportunity Cost
The PPF makes the
concept of opportunity
cost precise.
If we move along the
PPF from C to D the
opportunity cost of the
increase in butter is
the decrease in guns.
Production Possibilities and Opportunity Cost
A move from C to D
increases butter
production by 1 ton.
Gun production
decreases from 12 units
to 9 units, a decrease of 3
units.
The opportunity cost of 1
ton of butter is 3 units of
guns.
One ton of butter costs 3
units of guns.
Production Possibilities and Opportunity Cost
A move from D to C
increases gun
production by 3 units.
Butter production
decreases by 1 ton.
The opportunity cost of 3
units of guns is 1 ton of
butter.
One unit of guns costs
1/3 of a ton of butter.
Production Possibilities and Opportunity Cost
6
Units of food (millions)
4 8m 0.0
7m 2.2m
6m 4.0m
3
5m 5.0m
4m 5.6m
2 3m 6.0m
2m 6.4m
1m 6.7m
1
0 7.0m
0
0 1 2 3 4 5 6 7 8
Units of clothing (millions)
Economic Growth
Now
O
Clothing
Growth in potential output
5 years’ time
Food
Now
O
Clothing
Growth in potential and actual output
Food
O
Clothing
Growth in potential and actual output
y
x
Food
O
Clothing
Economic Growth
This Figure
illustrates the
tradeoff we face.
We can produce butter
or butter making
machines along PPF0.
By using some
resources to produce
butter-making
machines, the PPF
shifts outward in the
future.
Economic Growth
Economic Growth in
the United States and
Hong Kong
In 1960, Hong Kong’s
production
possibilities (per
person) were much
smaller than those in
the United States.
Economic Growth
£
Consumer
expenditure
The circular flow of goods and incomes
Goods and services
£
Consumer
expenditure
£
Consumer
expenditure
Wages, rent
dividends, etc.
£
£
Consumer
expenditure
GOODS MARKETS
FACTOR MARKETS
Wages, rent
dividends, etc.
£