Econ 2023 1st Edition Lecture 2Outline of Last Lecture 1. Basics of Economics.2. Scarcity:a. Fighting scarcity.b. Division of specialization and how it works.3. “Doing” Economics: a. Theories, hypotheses, and models.i. Simple Economic ModelOutline of Current Lecture 1. Pick up from end of last lecture notesa. Simple Economic Model.i. Production Possibility Curveii. Consumer Modelb. Types of Economies.Current Lecture2. Simple Economic Model: Production possibility frontier- shows all efficient combinations of output for an economy at a point and time, given available resources and technology. Ex. “ceteris paribus”: all other things held constant. Anything on the frontier is possible isand productively efficient. Anything below the curve is feasible but it is inefficient. Anything beyond the frontier are infeasible. a. The PPF can be used to illustrate: i. Scarcity: limits possibilities from the resources available. ii. The need for choice: what point you need to be at, which is usually located on the frontier.iii. Law of diminishing returns: “return”- what you get from something. As additional increments of a resource are added to producing a good or These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.service, the additional output associated with the additional increments of the resource will decline.1. Comparative advantage: compared to something else, you are relatively better which gives you a slight if not clear advantage. When a person, firm, or country can produce a good at a lower cost in terms of other goods. iv. Efficiency (and inefficiency): 1. Productive efficiency: “right” level of output- if you are on the frontier. When it is impossible to produce more of one good without decreasing the quantity produced of another good.2. Allocative efficiency: “right” mix of output- how you allocate your resources (divide them up) which depends on consumer preferences. This is where you want to be on the PPF. When the mix of goods being produced along the PPF represents the mix that society most desires.v. Changes over time: if technology gets better than the PPF then will become bigger. The shift could also change by increases in resources, or even by society’s preferences toward a certain product or need.b. Why is the shape of the production possibilities frontier often curved instead of straight? Typically, some resources are better suited for producing one good thananother, which means that there are diminishing returns when moving such resources away from producing what they are best suited for. 3. Theory: (continued) a. Positive statement: How the world is. Objective and testable.b. Normative statement: How the world should be. A standard for one’s society. c. Opportunity set: all possible combinations of consumption that someone can afford given the price of goods and the individuals income. d. Opportunity cost: measures cost of something by what is given up to obtain it; opportunity cost measures the value of the most valuable forgone alternative.e. Sunk costs: cost that were incurred the past and cannot be recovered; these should not be considered in marginal analysis since they do not change with a change in action. f. Invisible hand: idea that self-interested behavior by individuals can lead to positive social outcomes.4. Model, Consumer choice: a. Good: to get utility-“the relative satisfaction, enjoyment, or contentment a person receives from consuming a good or service.” you get satisfaction and benefit.b. Bad: budget constraint-all possible consumption combinations of goods that someone can afford, given the prices of goods when all income is spent; theboundary of the opportunity set, you have a limit which is a scarcity of resources-time and money (prices of the things you buy.)c. Ugly: B=p_x×X+p_x×Yd. We assume that consumers (economic decisions makes in general) are rational. For the consumer, scarcity manifests itself as constraints on behavior. Particularly,by what he/she can and cannot afford (budget constraint). The budget constraint is one of two factors that determines what you do and do not purchase, the other factor is your preferences. The tradeoff is dependent upon the resources and how we are using them. e. It tells us that limits are placed on the consumer because of scarcity.i. There are trade-offsii. The “opportunity cost of consuming an additional unit of one good in terms of lost consumption of the other good.”- Scarcity: you must sacrifice one thing to get another thing. f. The Law of Diminishing Marginal Utility means that the more of a good that a person receives, the added utility from each additional unit decreases.i. Marginal analysis: examination of decisions on the margins, meaning a little more little less from the status quo. “extra amounts” or “increment in”.4. Types of economies:a. Command Economy: an economy where economic decisions are passed down from government authority and where resources are owned by the government.b. Market Economy: an economy where economic decisions are decentralized, resources are owned by private individuals, and businesses supply goods and services based on demand.c. Mixed Economy: an economy that lies between a (pure) command economy and (pure) market economy.d. These economies involve three major areas to each of them:e. Globalization: the trend by which markets have increasingly crossed national borders.f. Exports: products (goods and services) that are produced domestically and sold abroad.g. Imports: products (goods and services) produced abroad but purchased