Microeconomics Module 1 & 3

Production and allocation:

Economics is the study of scarcity and choice

Economy: system that coordinates choices about the production and consumption of goods and services to people who want them

Production is the process by which goods and services are created

Allocation is the process by which goods and services are distributed to individuals

Efficiency for the economy requires both efficiency in production and in allocation

Efficient production: cannot produce more of good A without producing less of good B

Efficient allocation: cannot give individual A more of the goods she wants, without reducing wanted goods for individual B

Market economy

Production and consumption are the result of decentralized decisions by many firms and individuals

There is no central authority telling people what to produce or where to ship it

Each individual producer makes what he or she thinks will be most profitable, and each consumer buys what he or she chooses

No central authority forcing production or allocation

There need to be incentives and private property

In market economies, producers are free to charge higher prices when there is a shortage of something and to keep the resulting profits

These high prices and profits provide incentives for producers to make more of the most-needed goods and services and eliminate shortages

Incentives are rewards or punishments that motivate particular choices

Property rights establish ownership and grant individuals the right to trade goods and services with each other

Property rights create many of the incentives in market economies

With the right to own property comes the incentive to produce things of value, either to keep or to trade for mutual gain

And ownership creates an incentive to put resources to their best possible use

Use price system to allocate goods and services

Operative concept: FREEDOM

command economy

In a command economy industry is centrally owned and there is a central authority making production and consumption decisions

Individuals receive goods based on the decisions of the centralized authority

Firms (usually state-owned) produce according to mandated quotas

No incentives or competition

Difficulty finding necessary items, long lines at shops (Soviet Union)

Use ration system to allocate goods and services

Operative concept: COORDINATION

marginal analysis

Trade-offs at the margin: comparing the costs and benefits of doing a bit more of an activity versus a little bit less

The gain from doing something one more time is called the marginal benefit

The cost of doing something one more time is the marginal cost

Marginal analysis is the study of the costs and benefits of doing a little bit more of an activity versus a little bit less

scarcity

We have to make choices because resources are scarce

Scarcity is when there is not enough of a resource to satisfy all the ways society wants to use it

A resource is scarce when there is not enough of it available to satisfy the various ways society wants to use it

The scarcity of resources means that people and society have to make choices

Not all scarce goods are rare- there is a degree of rivalry

factors of production

The economies resources are the factors of production

A resource is anything that can be used to produce something else

Land: refers to all resources that come from nature

-timber, water, minerals, and all other resources that come from nature

Labor: the effort of workers

Capital: refers to manufactured goods used to make other goods and services

-machinery, buildings, tools

Entrepreneurship: describes the efforts of the entrepreneurs in organizing resources for production, taking risks to create new enterprises, and innovation to develop new products and production processes

-risk-taking, innovation, and the organization of resources for production

Money allows the factors of production to be enacted, facilitates the transfer of resources

opportunity cost

Opportunity cost is the value of what you must give up when you make a particular choice

Does not need to be monetary

Next best alternative (NBS)

The slope of a straight-line production possibilities curve is equal to the opportunity cost—specifically, the opportunity cost for the good measured on the horizontal axis in terms of the good measured on the vertical axis

Straight curve = constant opportunity cost

Opportunity costs are typically increasing

As more of a good is produced, its opportunity cost typically rises because well-suited inputs are used up and less adaptable inputs must be used instead

micro vs macro

Microeconomics is the study of how people (individuals, households, firms) make decisions and how those decisions interact

Macroeconomics is concerned with the overall ups and downs in the economy

Macroeconomics focuses on economic aggregates - economic measures that summarize data across many different markets (ex. unemployment rates)

positive vs normative economics

Positive economics is the branch of economic analysis that describes the way the economy actually works

Normative economics makes prescriptions about the way the economy should work

No "right" answer

Normative economics is subjective and based on values and feelings while positive economics is rigid and more fact based

trade-offs and PPC

You make a trade-off when you give up something in order to have something else

The production possibilities curve illustrates the trade-offs facing an economy that produces only two goods

Production possibilities curve: a model designed to improve our understanding of trade-offs by considering a simplified economy that only produces two goods

It shows the maximum quantity of one good that can be produced for each possible quantity of the other good produced

efficiency

Efficient: there are no missed opportunities

There has to be a trade-off for improvement in one area

An economy is efficient if there is no way to make anyone better off without making at least one person worse off

An example of inefficiency in production occurs where people in an economy are involuntarily unemployed: they want to work but are unable to find jobs

When that happens, the economy is not efficient in production because it could produce more output if those people were employed

The PPC shows the amount that can possibly be produced if all resources are fully employed

Efficiency for the economy requires both efficiency in production and in allocation

Occurs at all points on the PPC

economic growth

​​The production possibilities curve helps us understand what it means to talk about economic growth

Economic growth results in an outward shift of the production possibilities curve because production possibilities are expanded

The economy can now produce more of everything

There are two general sources of economic growth

An increase in the resources used to produce goods and services: labor, land, capital, and entrepreneurship

The other source of economic growth is progress in technology, the technical means for the production of goods and services

nonrival resource

A nonrival resource is a good that can be used to enhance production, but the use of which does not result in diminished supply for others

Some knowledge is scarce

Ex. public sign vs. secret recipe