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7/28/2019 Micro Economics Lecture 02
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Microeconomics
Lecture 2
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Overview of the Previous
Lecture
Microeconomics & Macroeconomics
Positive vs. Normative Economics
Markets
Competitive vs. Non-competitiveMarket Extent
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Topics to be Discussed
Problem of ScarcityFactors of Production
Production Possibility Frontier
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Economics; Another
Perspective Economics is the study of the choices
made by people who are faced with
scarcity. Scarcity is a situation in which
resources are limited but can be used
in different ways; so one good or
service must be sacrificed for another.
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Societys Choices
The decisions of producers,consumers and government
determine how an economic system
answers three fundamental questions:
1. What products do we produce?
2. How do we produce theseproducts?
3. Who consumes the products?
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Factors of Production
1. Natural resources:
The things created by acts of naturesuch as land, water, mineral, oil andgas deposits, renewable andnonrenewable resources.
Factors of production are the
resources that are used to produce
goods and services:
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Factors of Production
2. Labor:The human effort, physical and
mental, used by workers in the
production of goods and services.
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Factors of Production
3. Physical capital.
All the machines, buildings,
equipment, roads and other objects
made by human beings to producegoods and services.
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Factors of Production
4. Human capital:
The knowledge and skills acquired
by a worker through education and
experience.
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Factors of Production
5. Entrepreneurship:
The effort to coordinate theproduction and sale of goods andservices. Entrepreneurs take risk
and commit time and money to abusiness without any guarantee ofprofit.
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The Production
Possibilities Frontier (PPF)
The PPF curve
shows the possible
combinations of
goods and services
available to an
economy, given that
all productiveresources are fully
and efficiently
employed.
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The Production
Possibilities Frontier (PPF)
When the
economy is at
point i, resourcesare not fully
employed and/or
they are not usedefficiently.
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The Production
Possibilities Frontier (PPF)
Point g is
desirable
because it yieldsmore of both
goods, but not
attainable giventhe amount of
resources
available.
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The Production
Possibilities Frontier (PPF)
Point d is one of
the possible
combinations ofgoods produced
when resources
are fully andefficiently
employed.
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Scarcity and the PPF
To increase theamount of farm
goods by 10 tons,we must sacrifice100 tons of
factory goods.
Th P d ti
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The Production
Possibilities Frontier (PPF)The PPF curve isbowed out because
resources are not
perfectly adaptable tothe production of the
two goods.
As we increase theproduction of one
good, we sacrifice
progressively more of
the other.
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Shifting the PPF Curve
To increase the
production of one
good withoutdecreasing the
production of the
other, the PPFcurve must shift
outward.
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Shifting the PPF Curve
The PPF curve shiftsoutward as a result of:
An increase in the
economys resources
OR
A technological
innovation that
increases the output
obtained from a given
amount of resources
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Shifting the PPF Curve
From point d, anadditional 200tons of factorygoods or 20 tonsof farm goods arenow possible (or
any combination inbetween).
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Summary
Scarcity & Choices
Factors of Production
Natural ResourcesLabor
Physical Capital
Human Capital
Entrepreneurship
Production Possibility Frontier
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Why StudyMicroeconomics?
Microeconomic concepts are used by
everyone to assist them in making
choices as consumers and producers.
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Why Study
Microeconomics?
Two Examples
Corporate Decision Making
Ford & development of its SportUtility Vehicle (SUV)
Public Policy Design
Deregulation oftelecommunication policy
Wh S d
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Why Study
Microeconomics?
Ford & development of its Sport UtilityVehicle (SUV)
Questions Consumer acceptance and demand
Production cost
Pricing strategy Risk analysis
Organizational decisions
Government regulation
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Why Study
Microeconomics?
Deregulation of Telecommunication
policy
Questions
Impact on consumers
Impact on service providers
How to enforce the policy
What are the benefits and costs?
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Upcoming Topics
Real Prices vs. Nominal Prices
Demand and Supply: Basic Concepts
Market Mechanism
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Microeconomics
Lecture 2