Micro Economics Unit One

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Micro Unit One Schedule

Micro Unit 1, Lesson 1 (one day)

ECONOMICS: Concerned with the efficient use and management of limited productive resources to achieve maximum satisfaction of human material wants.

ECONOMICS: The study of our behavior in producing, distributing, and consuming material goods and services in a world of scarce resources.

SCARCITY: Wants exceed resources

ECONOMICS: The study of how limited resources are allocated in a world of unlimited wants.

We want more than we are capable of getting.

MICROECONOMICS: deals with specific economic units and a detailed consideration of these individual units. The economist is placing a specific portion of the economy under a microscope.

MACROECONOMICS: deals either with the economy as a whole or the basic subdivision or aggregates such as government, household, or business sectors, which make up the economy.

relation v. causation: Just because something happens when something else happens does not mean one caused the other. It may just be that they are correlated. (They are associated in some systematic but dependable way.) It may be that a third variable is the cause yet that variable makes the first two correlated.

An example of this is hot weather and electric bills. When the weather gets hot your parents electric bills go up. These two are not related by causation. (one does not cause the other.) Instead, they are correlated. When the weather gets hot the air conditioners are turned on and this causes the electric bills to go up.

To illustrate the example of ceteris parabus use the example of shooting a bullet out of a gun at an angle. How far does the bullet travel. In physics what do you consider. Velocity, projectory, friction (air pollution)...

CETERIS PARIBUS: Means other things being equal. In economics when you are working on a problem we must assume that only those variables will change. All others remain the same.

Unit One: Lesson 2

Economics is the study of the distribution of goods and services. It is all based on the idea that we live in a world of unlimited wants with limited or scares resources.

Examples of Resources are:

1) Land: This includes the land and its natural resources

2) Labor: This includes all services of people used in production except Entrepreneurial ability, which will be discussed later.

3) Capital: This is all the things used in production. Can anyone give me examples? (Tools, machinery, equipment, the factory itself...) (Notice that money is not capital because it in itself is useless.)

4) Entrepreneurial Ability: This is the person responsible for taking the first three and combining them into a product or service. He is also the one who bears the risk of the undertaking.

OPPORTUNITY COSTS: The amount of other products which must be foregone or sacrificed to obtain some amount of any given product.

Ex: In order to have more pizzas we must give up robots. The opportunity of pizzas is therefore robots.

OPPORTUNITY COST: The best alternative foregone.    This takes into consideration all types of opportunity costs rather than just production costs. Ex. Study or go on a date.

Production Possibilities Curve

Some assumptions are (CETERIS PARIBUS)

1) Fixed Resources:

2) Fixed Technology:

3) Two Products: (Usually one capital good and one consumer good)

4) We are achieving economic efficiency:

ALLOCATIVE EFFICIENCY: Resources are devoted to goods most wanted by society.

PRODUCTIVE EFFICIENCY: Least costly production techniques are used to produce wanted goods and services. If you building boats by hand you are not utilizing full production.

(A PPC is also called Production Possibility Frontier)

Inside the PPC you would not be at economic efficiency. We might not be at full employment.  This could be that workers that want to work can not find jobs. We are not at FULL EMPLOYMENT.

This also assumes that what is being produced is what we want to be produced.

1. What are the tradeoffs involved?

Notice that if they give up more capital goods for consumer goods they are hurting their future.

2. Why is the PPC concave?
As more and more of a good is produced it takes more away from the other because the resources are not easily converted. (Law of Increasing Opportunity Costs)

3. What does a point inside the curve represent?

4. Can you think of an example in history when we were inside the PPC?

5. What is the significance of a point outside the PPC.

Suppose that additional resources (land, labor, capital and entrepreneurial ability was found. (In other words the economy is expanding.)

HOW WOULD THIS AFFECT OUR PPC?

What happens if  new resources were found that assist in the production of only one product?

The same is true for technological advancements.

6. Under what conditions could the point outside the PPC be reached?

No point on the curve is more desirable from an economist standpoint. That gets into societies specific wants, which is outside the scope of the class.

Implicit Costs: Resources that could have been used in the next best alternative. You could be taking team sports or marketing instead of A.P. Economics. You could take a nap tonight instead of studying.

Explicit Costs: These are the measurable costs. It costs $3 for a Big Mac. This is measurable.

Marginal means change.

Marginal Cost v. Marginal Benefit:

Broad Social Goals 

1. Economic Freedom:  The right to choose your own occupation, employer, and use of your money (taxes?).  Business owners have the right to produce what they want and how much they want.

2. Economic Efficiency: gains must be more than costs.

                Efficiency must continually improve if we expect our standard of living to increase.    

        Measurement: Corporate Profits, GNP, GDP and Unemployment

3. Economic Equity: Equity means fairness

                Illegal to discriminate based on age, race, sex or disability

                False advertising, unfair pricing and dangerous products are prohibited. 

            Measurement: Unemployment, # of discrimination cases, minimum wage

4. Economic Security: protection from layoffs and illness

        Measurement: Welfare Total Recipients, Social Security Expenditures, and unemployment rate

5. Full Employment:

        If people can not work they can not support their family.  Society is hurt.

        Unemployment reduces efficiency because factors of production are not being used.

        Unemployed people must rely on others for support.  (Family, friend, government…)

            Measurement: unemployment rate

 6. Price Stability

        Inflation is a rise in the general level of prices

        Inflation reduces every person’s buying power

        Inflation is especially difficult for people on fixed incomes (Fixed incomes are incomes that do not rise as prices rise)

        Inflation Hurts Savers

            Measurement: Consumer Price Index (CPI)

 7. Economic Growth: the increasing of our production of goods and services

        Is necessary to satisfy the needs and wants of a growing population

        Do you want your children to live better than you do?

Do you want to improve the quality of home, medical care, transportation, and clothing….

        To do this requires economic growth.

                        Measurement: GNP, Corporate Profits and Dow Jones IA

Unit 1 Lesson 3:

The idea of any economic system is to answer the fundamental questions of what, how, and for whom to produce.  (also know as the three basic questions)

Capitalist Ideology:

A capitalist society must have:

1) Private Property: Individuals must have free control of property. They must be able to control, use and dispose of that property as they see fit.

2) Freedom of Enterprise and choice: must be able to produce and sell Goods and Services. There should be no government restrictions.

Owners must be able to use Goods and services in any way they see fit.

Workers must have access to any occupation they see fit.

Consumers must have access to all goods and services (at a price)

3) Role of Self Interest:
All parties must be free to try and get the most out of the system. (seller tries to get a high price while the buyer tries to get a low price.

4) Competition: Large number of buyers and sellers each free to enter and exit the market
If you have a large number of buyers and sellers this means none will be able to influence the price. (WHAT will happen if one seller decided to increase the price of his goods?)

5) Markets and Prices:
Capitalism is a market economy.

Market: simple mechanism or arrangement which brings buyers (demanders) and sellers (suppliers) of goods and services together.

Though price, the market decides what is to be produced, for whom and how.

6) Limited Government Interaction:
The market must be self regulating. As soon as government steps in it upsets the balance.

7) Use of capital goods:
Capital Goods: goods used in production (buildings, equipment...)

8) Division of Labor:
Individuals specialize in tasks. They then allow others to do jobs for them.

9) Use of Money as a medium of exchange. (very little bartering)

10) Specialization of tasks: We produce very little of what we consume. Instead we trade our services for money and money for goods and services.

                Weakness:  
       Discourages new ideas. 
      Lack of progress usually leads to a lower standard of living.  
      Traditional economies offer few choices.

 Command Economy
      A central authority (usually government) makes decisions.   The people are expected to follow the commands of the authority. The central authority defines their needs and wants.

     Strengths:  
        If circumstance requires a quick change in allocation of resource it can meet this need rapidly.

     Weaknesses:
          They are not designed to meet the wants and needs of the people. 
        People have little incentive to work hard in a command economy because they will get paid by meeting quota.
        Require huge bureaucracies to make decisions.  This slows the day to day decisions.   It also raises costs.
        Little flexibility to deal with day to day problems.  Decisions must be made with approval from above.
        People have trouble getting ahead in a command economy.  

Market Economy
People and business decide how to allocate resources. A market allows buyers and sellers to meet to exchange goods and services. The dollar forces decisions instead of central authority or customs.

     Strengths
        Markets can adjust over time.  
        Producers can decide WHAT to produce and HOW to produce.  This leads to greater efficiency in the market.
        Small degree of Government interference.
        Individual decisions direct the use of scare resources.   
        A very large variety of goods will be produced because there are buyers.
        Both majority and minority get what they want. 

     Weakness:
        The FOR WHOM part is weak.  
        Sometimes competition is not as great as it should be.  
        If market fail to meet needs and wants this system breaks down. It only rewards production, so those who do not produce suffer. (Young, old, sick.)

Chapter 19 (section 1) 

 Capitalism: an economic system in which private individuals and businesses own the factors of production.  Supply and demand determines the prices in a capitalist economy. 

    Advantages of Capitalism:
        More efficient than communism and socialism
        Produces more, higher quality goods at lower prices than other two systems.
        Allows for individual freedom.
       People are allowed to use their time, energy, talent, and resources as they see fit
       People can keep profits if they make them
        Capitalist economies are flexible
        People will not buy the products if they do not want them so…….
       Business is motivated to listen to consumer
      Suppliers must find product people want or go out of business  
     Consumer is sovereign
      Suppliers have to adjust to meet consumer demands.

  Disadvantages of Capitalism:
        Pure capitalism does not meet the needs of the least skilled, the disabled, the young, old or least productive.

Socialism: many of the basic productive resources are government owned and operated.  Prices play a major role in distribution.

  Advantages of Socialism:
        Takes care of those that can not afford the benefits of society
        People elect officials who make economic decisions.

  Disadvantages of Socialism:
        Less efficient because business have no incentive to cut costs.
        Special interests often take over.

Communism: both a political and economic framework, all property is collectively owned and labor is organized for the common advantage of the community.

        In theory goods and services have no prices so there is no need for payment for the factors of production.

   Advantages of Communism:
        Workers can not be fired.
        Many pubic good provide

   Disadvantages of Communism:
        Individual freedom is lost.  (little or no freedom to choose jobs or change jobs)
        Lack of incentives to produce what is wanted by society
        Inefficiency of centralized planning.

Unit 1 Lesson 4 (Absolute and Comparative Advantage)

Input vs. Output:

Output problems state that you get a certain amount of product out of a given input. Examples miles per gallon, pieces of gum per dollar...

Input problems state that it takes a certain amount of input to get a given product. Examples are hours to do a job, apples to make a pie,

Absolute Advantage:

For output problems you look at if one nation (individual/company) can produce more output with the same resources as the other.

Examples: Output: (Tons produced per hour)  

On the other hand Nancy can produce 45 tons of cheese to Teds 15 tons. Therefore Nancy produces Cheese. She has the absolute advantage in Cheese.

One nation (individual/company) can produce a good at a lower opportunity cost than the other. This comes into play when one individual (nation, company....) has the absolute advantage in both.

Output method: put the output of each product over the output of the other product for the same person. This makes a fraction. Look at the opportunity cost. The person with the lowest opportunity cost should produce the good that costs the least.

NO!!! He should produce the one that he has comparative advantage in and then trade for the other.

Now ¾ is less than 2 so Mike needs to produce corn.

½ is less than 4/3 so John needs to produce Wheat.

  Input Method: divide the input required for each product into the input for the other product. Then take the one with the lowest opportunity cost.  

                                                              Apples to make one

 5/3 is less than 6/3 so Jeff should produce pie. 3/6 is less than 3/5 so Judy should produce Juice.

Practice Problems

For each of the following problems identify who has absolute advantage, who has comparative advantage and if it is input or output problem.

2.  Number Produced

3.   Acres to Produce

5. Hours needed to

6.  Number per acre      

Answers to above problems

Comparative and Absolute advantage can be looked at in combination with a production possibility curve. A straight line curve is used to simplify the math.

Given the above information.  

Draw each PPC.

Who has the absolute advantage in wheat?

Who has the comparative advantage in wheat?

 People trade because both parties benefit from voluntary exchanges. This is true even if one nation has both a comparative and absolute advantage.        

Terms of Trade: the rate by which one unit of a good or service is traded for another unit of a good or service such that they do better trading than they do on their own.  

In the above example if each country produces the maximum of that good that they have the comparative advantage in they could then trade for the other.

Nebraska produces 60 wheat and Florida produces 30 pears.  They then trade with each other.

Reducing the earlier fraction we know that for Nebraska 4w = 1p.  That means that when they trade they are giving up wheat so they want to give up less than 4 wheat for 1 p.  Would they be happy to give up 3w for 1p?  

For Florida 3w = 1p.  How many wheat do they want from Nebraska for 1p?   

Would Florida take more than 3?   

The two nations will haggle over the terms of trade and it will end up so that 1p = somewhere between 3 to 4 wheat.

By producing what they are good at and trading they are both doing better than they would have before.

Why Specialize?

1. more efficient use of resources

2. increased production without increase in resources

3. increase division of labor      

Given that each before specialization Florida wanted  30 wheat and 20 pears and Nebraska wanted 20 wheat and 10 pears what has happened when they specialize?  In other words, what are the gains from trade?

What happens to the production possibility curve when specialization occurs?

For each of the following practice problems answer the following questions.  

Who has absolute advantages?

Who has comparative advantages?

What are the Terms of Trade

Given that each country was at the highlighted  point on the PPC, what has happened when they specialize?

What happens to the production possibility curve when specialization occurs?

       Answers to these three problems

Circular Flow Diagram:

Two groups of decision makers: Households and Business (later the government will be added.)

The market coordinates these two groups.

The upper half of the diagram portrays the resource market. It is through the resource market that households supply the resources for the business. (Land, Labor, Capital, Entrepreneurial Ability) Notice that through this market that the business demand resources.

The lower portion of the diagram represents the product market. It is through this market that the households spend the money they receive through he resource market. Here the household is the demander and the businesses are the suppliers.

Scarcity and opportunity costs enter in this market through the supply of resources by the households. They only have a limited amount of resources to provide and therefore have an opportunity cost in everything they provide.