January 29th 2014 the desire for it 3 Questions Economics Study of choice under conditions of scarcity Scarcity when the amount of something available is insufficient to satisfy 1 What to produce 2 How to produce 3 Who are you producing for and how to allocate it 2 types of scarcity 1 2 limited amount of time limited spending power energy funds scarcity implies choice you select what goods and services you consume based on the amount of money you have Opportunity Cost What s given up when taking an action making a choice When the alternatives to a choice are mutually exclusive only the next best choice is used to determine the opportunity cost of the choice Opportunity cost of attending college opportunity cost for one year Explicit costs tuition fees books supplies Implicit costs forgone income what you re giving up to go to college Explicit Costs sacrificed and actually paid for a choice Implicit Costs value of something sacrificed when no direct payment is made Is college the right choice Cost can be lowered if get scholarship hate college Benefits financial higher earning enjoy college Time is money Society Goals Highest standard of living clean air safe streets good schooling etc Problem scarcity of resources Resources things we use to make goods and services that help us achieve our goals 1 Labor amount of time spent producing goods and services 2 Capital long lasting tool used to produce other goods 2 types Physical capital machienery streets equipment buildings etc Human Capital level of education skills of workforce Capital should last at least a year Capital stock total amount of capital in a nation that is productively useful at a particular point in time All the capital physical and human is created in previous periods 3 Land physical space on which production takes place and the natural resources that comes with it 4 Entreprenuirship Ability and willingness to combine the other three resources lang labor capital into a productive resource Innovator a b Risk taker no garuntee that product will be successful Inputs anthing used to produce a good The 4 resources land capital labor entreprenuirship are special types of input Inputs For society opportunity cost arises from scarcity of resources Virtually all production has opportunity cost To produce more of one thing society must shift resources away from producing something else Microeconomics Behavior of individual households firms governments etc Macroeconomics Behavior of overall economy supple inflation budget deficit Macroeconomics is based on microeconomics Positive economics study of how the economy works Normative Economics practice of recommending policies to solve economic problems 4 Resources Society s production Choice how much of it s resources to allocate MISSING REST OF FIRST SLIDE 2 3 14 Production Possibilities Frontier PPF A curve showing all combinations of two goods that can be produced with the current available amount of resources and technology Society s choice Points inside the PPF Unattainable Points outside the PPF you can t pass the max point of production Increasing Opportunity Cost The more of something we produce the greater the opportunity cost of producing even more of it Reason for increasing Opportunity Cost Most resources are better suited than others there s no such thing as free lunch free lunch is possible only when inside the PPF QUESTION 1 If opportunity cost is constant what will the PPF look like At any point on the frontier the slope doesn t change because cost is constant so the graph is a straight line Productivity Inefficient More of at least one good can be produced without sacrificing the production of any other good Firms try to eliminate productive inefficiency If inside the PPF you can increase production of one product without decreasing the production of another Recession Slowdown in overall economic activity The economy operates inside the PPF Economic growth produce more of everything the PPF shifts upward and the economic productive capacity grows Sources of economic growth Increase in available resources human and physical capital and technological change Trade off consumption vs growth More capital produced this year more capital used in production next year economic growth Trade off less consumer goods this year look at figure 6 Economic Systems Features 1 specialization each person concentrates on a limited number of activities 2 exchange trade trade with each other to get what we want Gains develop expertise minimize downtime comparative advantage vs absolute advantage Absolute advantage produce a goods or services using fewer resources than other producers Comparative advantage produce a good or service at a lower opportunity cost than other producers 1 fish 1 cup berries 1hr 1 5 hr Mary 1 hr 3 hr Gill Mary s opportunity cost 1 c berries 1 fish 1 fish 1 c berries Gill s opportunity cost 1 c berries fish 1 fish 2 c berries Comparative Advantage higher total production A nation has comparative advantage in producing a good if it can produce it at a lower cost QUESTION 2 If 2 countries share the same opportunity cost for a good then There is no basis for trade February 7 2014 Supply and Demand economic model designed to explain how prices are determined in certain types of markets Market Group of buyers and sellers with the potential to trade with each other Prices important role in the economy which households will get which goods and services which firms will get which resources Macroeconomics broadly defined markets Microeconomics more narrowly defined markets Aggregation combining distinct things into a whole combining micro into macro Circular flow simple model that shows how goods resources and dollar payments flow between households and firms Two types of markets Product Market Interaction between you and the seller Resource Market Households trade resources with each other lease your land Look at slides for circular flow model ch 3 Households spending product market revenue business firms resource payments Resource Markets income households Households labor land capital Resource markets Labor land capital Business firms goods and services supplied product market goods and services demanded households how households get their income to spend in the product market Q1 In the circular flow consumers are in markets Demanders resources Competition in markets Imperfectly competitive markets Individual buyers or sellers can control or influence the price of