microeconomics ch 1
TRANSCRIPT
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M i c r o e c o n o m i c
s
Dr. Karim Kobeissi
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Chapter 1: The Core Issues
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Economics, Microeconomics, andMacroeconomics
Economics: economics is the social science that studies howindividuals, frms, and nations make choices on allocating scarce
resources to satisy their unlimited wants Economics distinguishes!etween microeconomics and macroeconomics
- Microeconomics is the !ranch o economics that analy"es the
market !ehavior o individual consumers and frms in an attempt to
understand the decision#making process o frms and households Itis concerned with the interaction !etween individual !uyers andsellers and the actors that in$uence the choices made !y them
- Macroeconomics is the !ranch o economics that studies the
!ehavior o the economy as a whole and not %ust on specifc
companies, !ut entire industries and economies This looks ateconomy#wide phenomena, such as 'ross (ational )roduct *'+)and how it is a-ected !y changes in unemployment, national
income, rate o growth, and price levels
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E c o n o m i c s , T h e . a s i c C o n c e p t s
The si/ !asic concepts in the defnition o economics
are:
1. Economic Agents: )articipants in the economy
such as households, governments and !usiness
frms that engage in speciali"ation, production,
e/change, and consumption
0 Scarce Resources: )roductive resources *also
called actors o production such as land, la!or, and
capital, or which the limited amount availa!le is less
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E c o n o m i c s , T h e . a s i c C o n c e p t s
Choice: .ecause resources are scarce, people
must decide how to use them
2 Specialization: 3gents produce a limited num!er
o things that they can make !etter than others
4 Exchange: .ecause agents produce only a ew
things, to consume other goods they must engage
in trade with other *specialist producers
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E c o n o m i c s , T h e . a s i c C o n c e p t s
5 Economic System: 3n organi"ed way in which a
nation allocates its resources and share out goods
and services in the national community The
im!alance !etween wants and the a!ility to meet
them re6uires an economic system to provide or
orderly allocation o scarce resources In a
capitalist society, people own the productive
resources7 in a socialist economy, the government
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imite! Resources "s #nlimite! $ants
8uman wants *the amounts o goods that
would !e desired i they were ree are
unlimited !ut resources are limited
Thus, %he la& o' scarcity states that
wants always e/ceed society9s a!ility to
meet them Thereore, every society
aces %he Economic (roblem o
somehow choosing &hat to produce,
ho& to produce, and 'or &hom to
i i ! li i !
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imite! Resources "s #nlimite! $ants)con*
%he three basic +uestions in this !ecision are:
1 $hat: hat goods and services should !e
produced;
0 ,o&: hat com!inations o resources should !e
devoted to manuacturing the goods and services
produced;
-or $hom: when goods and services are produced,
who should get them;
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p p o r t u n i t y C o s t
hen we choose to use resources to produce
one thing, we must give up producing
something else with those resources This
trade#o- comes with a cost
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p p o r t u n i t y C o s t ) c o n *
The pportunity Cost o any action is the
loss o the ne/t !est alternative that the
action eliminates
3 -ree pro!uct has "ero opportunity cost!ecause no other product has to !e given
up in order to have more o the ree
product
3 Scarce pro!uct has a positive opportunity
cost, !ecause in order to have more o it
( ! ti ( ibiliti !
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(ro!uction/(ossibilities an!pportunity Cost
(ro!uction possibilities: the various
com!inations o fnal goods and services
that could !e produced in a given time
period with all availa!le resources and
technology
The (ro!uction/(ossibilities Cur0e )((C*
shows all the possi!le com!inations o
output that can !e produced when
resources are used to their ullest
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1 )oints on the rontier,such as *A & B), areattainable by theeconomy and areefcient.
0 )oints !eyond the rontier,such as *C), are notattainable due to scarcityo resources.
)oints within the rontier,such as *D), are attainablebut are inefcient sincethey occur when resources
are either unemployed orincorrectly allocated
(ro!uction/(ossibilities an! pportunityCost )con*
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The +i-erent Com!inations o
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(ro!uction/(ossibilities an! pportunityCost )con*
The production#possi!ilitiescurve is conve/ !ecause o
the a& o' 4ncreasing
Costs5 which states that as
more o any product is
produced the opportunity cost
( ! i ( ibili i ! i
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(ro!uction/(ossibilities an! pportunityCost )con*
pportunity costs increase since some
'actors o' pro!uction are better suite! topro!ucing one goo! than another. @ore/ample, consider moving rom point A to pointB on the production possibilities rontier. This
requires that resources be switched away romthe production o good and into the productiono !ood ". The #rst resources that are shited arethose that are relatively good at producing "
$and bad at producin! ). %entually, however,resources must !e moved that are not so good atproducing " $and not so bad at producin! ).'ence, since the resources are not as well suitedat producin! ", more must be switched. As aresult, the opportunity cost o producing more "
( ! ti ( ibiliti !
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(ro!uction/(ossibilities an!pportunity Cost
The (ro!uction/(ossibilities Cur0e *))C
illustrates two essential principles:
1* Scarce resources: there is a limit to the
amount we can produce in a given time with
availa!le resources and technology
6* pportunity costs:we can o!tain additional6uantities o one o the goods only !y reducing
production o another good
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EAciency and the )roduction#)ossi!ilities Curve
E7ciency:ma/imum output o a goodrom the resources used in production
Every point on the 'rontier o' thepro!uction possibilities cur0eis a
point o eAciency
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Economic 'rowth
Economic gro&th:an increase in output7an e/pansion o production possi!ilities Baises our standard o living
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Economic 'rowth
8
PPC1
PPC2
9oo!
9oo!
;
Either increase resource inputsorimprove technology, or !oth *.
to C ,$ to pro!uce=(ro?tably>7 produce an
accepta!le good or service while keepingproduction costs low
-R $,M to pro!uce= )roduce orthose who are !oth &illing an! able topay>or it
Th e M a r ke t M e c h a n i s m
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The 'overnment +irectives
3t its e/treme, government could dictateanswers to all three 6uestions
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3 Mi/ture o .oth
The market is highly eAcient in productiono wanted goods and services
The government acts as a maintainer o
!alance in the economy Makes sure the market does not go to e/cesses
either in underproduction or overproduction
Begulates production to ensure that goods and
services are sae 3cts to redress e/cessive ine6ualities *provide
support or groups who don9t get products inthe market system
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Market and 'overnment @ailure
I the market does not produce the mi/ ogoods that society desires, market ailureis said to occur This provides an openingor government to step in I government can move us closer to the mi/
society desires, the intervention is successul
8owever, government can do theopposite, or impose such high costs thatthe market simply ceases to produce
This is government ailure
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Types o Economic 3nalysis
)ositive analysis in economics ocuses onDwhat is and is !ased on acts @ore/ample: DThe unemployment rate is 1=G
(ormative analysis ocuses on Dwhat should!e and is !ased on opinions and
%udgments @or e/ample: Dtheunemployment rate is too high