Ch 1&2

intro to economics

definition of economincs

• scarcity: our inability to get everything we want

  • what everyon can get and what society can get is limited by the productive resources available

• Incentive: a reward that encourages an action or a penalty that discourages one

• economics: the social science that studies that choices that individuals, businesses, govenments, and entire societies make as they come with scarcity and the incentives that influence and reconcile those choices

• math is an important tool for economists

  • reality is incredibly complex.

  • simplified models allow an understanding of the complexity

• Microeconomics

  • the study of individual firms, consumers, and markets within the economy

  • examples

    • pharmaceuticals raising prices

• Macroeconomics

  • the study of the aggregate (overall) economy

the big economic questions

• Goods and services are the objects that people value and produce to satisfy needs

  • goods: physical objects

  • services: task preformed for people

• what?

  • what goods and services will be produced and in what quantities?

• how?

  • how will the goods and services be produced?

  • factors of production

    • land

    • labor

    • capital

    • entrepreneurship

• who (the owl questions)

  • for whom will the goods and services be produced

  • larger the income more ther can buy

  • land earns rent

  • labor earns wages

  • capital earns intrest

  • entrepreneurship earns profit

methods of organizing an economy

• traditional

  • this year’s answers are the same as last year’s answers

• command

  • government planners determine the answers and then create plans for producers

  • Cuba, former Soviet Union, North Korea

  • doesn't work out well because of people's behaviors

    • people make choices to advance their self-interest

      • self-interest vs social interest

      • Review PPT for nail factory analogy

• capitalism

  • markets, prices, property rights

    • property rights:

      • socially determined legal rights that govern the use of and disposal of property (anything you can own)

        • mc d has to hire 5 brain surgeons (makes 1m and has to pay 5m) vs 5 students (40000 and pay 60000)

          • social perspective: higher the student and let the surgeons save lives

          • social interest: you pay less if you hire the students as opposed to the surgeon

  • self-interest advance social-interest

Production possibilities frontier (PPF)

• helps illustrate the “what?” and “how?” questions

• limits to production

• RESOURCES and technology

  • labor

  • capital

    • a factory

    • truck

    • physical capital

  • land

    • natural resources “gifts of nature”

    • oil, copper, trees, etc

  • entrepreneurship

    • who runs and organizes other resources to produce goods and services

  • technology

    • How do we combine resources and produce

• points of the frontier are production-efficient

• points inside are production-inefficient

  • unduesd- idle but could be working

  • misallocated- assigned to task for which they are not the best match

• points outside the frontier are not attainable

• ppf can shift depending on improved

• Allocative efficiency

  • when good and services are produced at the lowest possible cost and in the quantities that provide the greatest benefit

• start with a PPF for a student

  • two activities

    • studies (produces GPA)

    • socializes (produces dates)

  • moving from a point inside the frontier to the frontier there is no opportunity cost, however, this isn't necessarily better

    • ex: 1005 on a test vs 60% on a test. you can move up with 60% to improve your grade but the 100% is better

  Opportunity cost:

  • Take what you loose by what you gain

  • loose/gain

  • the opp cost of an action is the next best alternative that is lost

    • ex: either dating or studying

      • in order to increase GPS you have to decrease the dates

      • increase dated → decreased GPA

    • lunch (Big Mac $8, sandwich $8, Pizza $8)

      • in this example what are you doing or giving up for the $8

        • OPP cost buying the sandwich COSTS u the Big Mack

  • its a ratio

    • the decrease in the quantity produced of one group / the increase in the quantity produced of another

  • law increasing opportunity cost

    • moving along a pdf, the opportunity cost of a product, good, or service increases as more is produced

PPF for an economy:

shows the maximum combinations of goods and services that can be produced

marginal cost / benefit

• Marginal cost: the opportunity cost of producing one more unit of it

• marginal benefit: the benefit received from consuming one more unit of it

  • subjective and depends on the people's preference

  • preference is illustrated bu a Marginal benefit curve

    • MBC shos the relationship between the marginal benefit from a good and the quantity consumed of that good

remembering opportunity cost

• opportunity cost of an action is the best alternative forgone

• bowed out ppf you have the law of increasing opportunity cost

most desirable production point

• all points on the ppf are productive and efficient but not all points are equally desirable

the ppf and the big three questions

• what ✅

• how ✅

• who

gains from trade - comparative advantage and absolute advantage

• Comparative advantage: a person in an activity can perform the activity at a lower opportunity cost than everyone else

• absolute advantage: a person is more productive than another

• difference:

  • comparing productivities- production per hour- where as comparative advantage involves comparing opportunity cost

what can we use the ppf for?

• economic growth (being able to produce more stuff)

  • because we have more resource the ppf moves outwards

  • opt cost ( more machines but we give up other stuff)

• Technological change: the development of new goods and od better ways of producing goods and services

• capital accumulation: the growth of capital resources, including human capital

• can ppf shift in? yes!

  • ukraine ppf 2022 with the invasion and los of land and life

economic coordination

four complementary social institutions od Decentralized coordination

1. firms

   1. an economic init that hires factors of production and organizes them to produce and sell goods and services

2. markets

   1. any arrangement that enables buyers and sellers to get information and to do business with another

3. property rights

   1. the social arrangements that govern the ownership, use, and disposal of anything that people value

      1. real property: land building and durable goods

      2. financial property: stokcs and bonds and money in the bank

      3. Intelectual property: tangle product of creative effort (books, music, computer programs) and are protected by copyrights and patents

4. money

   1. any commodity or tone that is generally acceptable as a means of payment