Professional Documents
Culture Documents
Basic Concepts of Economics
Basic Concepts of Economics
Basic Concepts of Economics
Economic Concepts
Examples:
You must choose between buying jeans or buying shoes.
Businesses must choose how many people to hire
Governments must choose how much to spend on welfare.
Economics Defined
Economics-Social science concerned with the
efficient use of limited resources to achieve
maximum satisfaction of economic wants.
(Study of how individuals and societies deal
with ________)
scarcity
Benefit
Cost
1st
2nd
3rd
Total
$30
$15
$5
$50
$10
$10
$10
$30
Marginal Analysis
In economics the term marginal = additional
Thinking on the margin, or MARGINAL ANALYSIS
involves making decisions based on the additional
benefit vs. the additional cost.
For Example:
You have been shopping at the mall for a half hour, the
additional benefit of shopping for an additional half-hour
might outweigh the additional cost (the opportunity cost).
After three hours, the additional benefit from staying an
additional half-hour would likely be less than the additional
cost.
Trade-offs
ALL decisions involve trade-offs.
Trade-offs are all the alternatives that we give up
whenever we choose one course of action over others.
(Examples: going to the movies)
The most desirable alternative given up as a result of a
decision is known as opportunity cost.
11
The Production
Possibilities Curve
(PPC)
Using Economic Models
Step 1: Explain concept in words
Step 2: Use numbers as examples
Step 3: Generate graphs from numbers
Step 4: Make generalizations using graph
12
4 Key Assumptions
Only two goods can be produced
Full employment of resources
Fixed Resources (Ceteris Paribus)
Fixed Technology
13
a
14
0
b
12
2
c
9
4
d
5
6
e
0
8
f
0
10
PRODUCTION POSSIBILITIES
How does the PPG graphically demonstrates scarcity,
trade-offs, opportunity costs, and efficiency?
Impossible/Unattainable
14
A
B
12
Bikes
G
C
10
Efficient
Inefficient/
Unemployment
E
0
10
Computers
15
Opportunity Cost
Example:
1. The opportunity cost of
moving from a to b is 2 Bikes
2.The opportunity cost of
moving from b to d is 7 Bikes
16
17
PRODUCTION POSSIBILITIES
CALZONES
PIZZA
4
0
3
1
2
2
1
3
0
4
18
PRODUCTION POSSIBILITIES
A
PIZZA
ROBOTS
18 17
0
1
15
2
10
3
0
4
Example:
1. The PER UNIT opportunity cost
of moving from a to b is
1 Bike
2.The PER UNIT opportunity
cost of moving from b to c is
1.5 (3/2) Bikes
3.The PER UNIT opportunity
cost of moving from c to d is
2 Bikes
4.The PER UNIT opportunity
cost of moving from d to e is
2.5 (5/2) Bikes
20
21
PRODUCTION POSSIBILITIES
4 Key Assumptions Revisited
Only two goods can be produced
Full employment of resources
22
PRODUCTION POSSIBILITIES
What happens if
there is an increase
in population?
Robots
Q 14
13
12
11
10
9
8
7
6
5
4
3
2
1
Pizzas
Q
23
PRODUCTION POSSIBILITIES
Robots
Q 14
What happens if
there is an increase
in
population?
C
13
12
11
10
9
8
7
6
5
4
3
2
1
Pizzas
Q
24
PRODUCTION POSSIBILITIES
Robots
Q 14
Technology
improvements in pizza
ovens
13
12
11
10
9
8
7
6
5
4
3
2
1
1
Pizzas
Q
25
26
27
A
B
12
Bikes
Productively Efficient
points are A through D
G
Allocative Efficient
points depend on the
wants of society
10
F
2
10
Computers
28
CURRENT
CURVE
FUTURE
CURVE
FUTURE
CURVE
Capital Goods
Capital Goods
Panama - FAVORS
CONSUMER GOODS
CURRENT
CURVE
Consumer goods
Consumer goods
Panama
Mexico
29
PPC Practice
Draw a PPC showing changes for each of the
following:
Pizza and Robots (3)
1. New robot making technology
2. Decrease in the demand for pizza
3. Mad cow disease kills 85% of cows
Consumer goods and Capital Goods (4)
4. BP Oil Spill in the Gulf
5. Faster computer hardware
6. Many workers unemployed
7. Significant increases in education
30
Question #1
New robot making technology
Q
Robots
Pizzas
31
Question #2
Decrease in the demand for pizza
Robots
Q
The curve doesnt shift!
A change in demand
doesnt shift the curve
Pizzas
32
Question #3
Mad cow disease kills 85% of cows
Robots
Q
A shift inward only for
Pizza
Pizzas
33
Question #4
BP Oil Spill in the Gulf
Capital Goods (Guns)
Decrease in resources
decrease production
possibilities for both
34
Question #5
Faster computer hardware
Capital Goods (Guns)
Quality of a resource
improves shifting the
curve outward
35
Question #6
Many workers unemployed
Capital Goods (Guns)
36
Question #7
Significant increases in education
Capital Goods (Guns)
37
International Trade
Why do countries trade and
what is specialization?
38
39
Benefits of Specialize
and Trade
42
International Trade
Trade: 1 Wheat for 1.5 Sugar
0
30
1.5
29
28
4.5
27
26
7.5
25
24
10.5
23
12
22
13.5
21
15
20
16.5
19
18
18
19.5
17
USA
45
Brazil
40
35
30
Sugar (tons)
25
20
15
30
25
20
15
10
10
Brazil Makes
ONLY Sugar
20
18.5
17
15.5
14
12.5
11
9.5
6.5
10
3.5
11
0
5
10
15
20
Wheat (tons)
25
30
10
15
20
Wheat (tons)
43
International Trade
TRADE SHIFTS THE PPC!
USA
45
Brazil
40
35
AFTER TRADE
30
Sugar (tons)
Sugar (tons)
30
25
20
15
25
20
15
10
10
AFTER TRADE
0
5
10
15
20
Wheat (tons)
25
30
10
15
20
Wheat (tons)
44
Wheat
USA
Sugar
Sugar (tons)
Sugar (tons)
20
15
15
10
10
15
20
Wheat (tons)
25
30
10
15
20
Wheat (tons)
45
Output Questions:
OOO=
Output: Other goes Over
46
Input Questions:
IOU=
Input: Other goes Under
47
48
Unit 1: Basic
Economic Concepts
49
50
51
Economic Systems
1. Centrally-Planned
(Command) Economy
2. Free Market Economy
3. Mixed Economy
52
Centrally-Planned
Economies
(aka Communism)
53
56
57
58
CURRENT
CURVE
FUTURE
CURVE
Consumer goods
Cuba
FUTURE
CURVE
Capital Goods
Capital Goods
Communism in the
Long Run
CURRENT
CURVE
Consumer goods
Puerto Rico
61
62