Economics 1
2013-14
(Lecture 1)
Welcome!
Economics 1 (EC107)
2013-14: Micro (Term 1)
Robin Naylor, Department of
Economics, Warwick
1
Economics 1
Accompanying Resources
• Module Website
– see various tabs (thumbprint, assessment, feedback)
– see links to slides and pod/webcasts/transcripts
• Module Manual
– (with reading list)
• Seminar Work and Problem Sets and e-forums
•Departmental Handbooks and Web-Sites
•MyEconomics Portal
Robin Naylor, Department of
Economics, Warwick
2
Economics 1
Organisation (see module manual for details)
• Lecture timetable
• Lecture notes/handouts
• Seminar/e-forum arrangements
(from week 3)
• Personal Essays
• Examination and Assessment
Robin Naylor, Department of
Economics, Warwick
3
Economics
Readings (Micro)
• Besanko and Braeutigam, Microeconomics 4th Edition, Wiley, 2011
• Estrin, Laidler and Dietrich (ELD), Microeconomics, 2008
+ Many other textbooks plus other literature: see Module Manual
Robin Naylor, Department of
Economics, Warwick
4
Term 1: Micro Topics
• Introduction
Scarcity and Trade; Markets
• Topic 1
Household behaviour
• Topic 2
Firm behaviour
• Topic 3
Product markets
• Topic 4
Factor markets
• Topic 5
Market Structure, Efficiency and
Failure
Robin Naylor, Department of
Economics, Warwick
5
Introduction
• The fundamental problem of scarcity
– Cause: excess of wants over ‘natural’ supply
– Consequences:
(i) Choices over production
(ii) Trade-offs and opportunity costs
(iii) Rationing of distribution (Markets etc . . .)
Consider a 2-good economy:
Robin Naylor, Department of
Economics, Warwick
6
Introduction
• The fundamental problem of scarcity
Defence
D-Max
The Production
Possibility Curve
The Production
Possibility Set
0
F-Max
Robin Naylor, Department of
Economics, Warwick
Food
7
Introduction
• The fundamental problem of scarcity
Defence
.c
D-Max
.b
What can you say about
points a, b and c?
.a
0
F-Max
Robin Naylor, Department of
Economics, Warwick
Food
8
Introduction
• The fundamental problem of scarcity
Defence
D-Max
The MRT is the amount of one good (D) we have to
give up in order to have an extra unit of the other good
(F).
.b
So the MRT is increasing
in the case of the concave
PPC. Why?
.d
.a
0
F-Max
Robin Naylor, Department of
Economics, Warwick
Food
9
Introduction
• The fundamental problem of scarcity
Defence
The PPC shows us the trade-off that Society has to
make between 2 goods.
Note also relationship to
Opportunity Cost
What about the trade-off
that the Society is
prepared to make?
0
Food
Robin Naylor, Department of
Economics, Warwick
10
Introduction
Defence
The slope of the Indifference
Curve shows us how much of
one good the society is
prepared to give up (‘trade
off’) in order to have an extra
unit of the other good:
This is the Marginal Rate of
Substitution (MRS).
Why might it be convex?
IC
0
Food
Robin Naylor, Department of
Economics, Warwick
11
Introduction
A set or family of
Indifference Curves
Defence
IC3
IC2
IC1
0
Food
Robin Naylor, Department of
Economics, Warwick
12
Introduction
‘a’ is not technically efficient.
‘b’ is.
Defence
So is ‘d’. So how can we
choose between ‘b’ and ‘d’?
.b
.d
.a
0
They are both ‘technically’
efficient.
But they are not both
Allocatively Efficient . . .
Food
Robin Naylor, Department of
Economics, Warwick
13
Introduction
On which IC would
society like most to be?
Defence
At what point is this?
.b
.d
.a
Where MRS = MRT.
0
Food
Robin Naylor, Department of
Economics, Warwick
14
Introduction
Gains from Trade
• Consider 2 economies, Red and Blue:
Y
PPC-R
PPC-B
Who has an absolute
advantage in producing
X?
And Y?
X
Robin Naylor, Department of
Economics, Warwick
15
Introduction
Gains from Trade
• Consider 2 economies, Red and Blue:
To raise output of X by the amount
dX, the required reduction in Y is
smaller in Blue than in Red.
In other words, the Opportunity
Cost of the extra X is lower in Blue
than in Red.
Y
dX
dX
Robin Naylor, Department of
Economics, Warwick
We say that Blue has a
Comparative Advantage in the
production of X.
And Red has a Comparative
Advantage in producing Y.
X
16
Introduction
Suppose initially, Blue is at point ‘aB’ and Red is at ‘a-R’.
If Blue gives up one unit of Y, it
raises output of X by dX.
Y
Suppose that at the same time Red
cuts production of X by the same
amount, dX: then it can raise output
of Y by 3 units.
dY=3
dX
dY=1
a-R
a-B
dX
Robin Naylor, Department of
Economics, Warwick
So what is the total change in
‘World’ production of X?
And of Y?
X
17
Introduction
So with an unchanged total
production of X and a higher total
production of Y, the countries
could*:
Y
Trade such that Blue exports dX to
Red and, in return, Red exports 2
units of Y to Blue.
b-R
dY=1
b-B
dY=1
a-R
What would this look like in terms
of each country’s PPC?
a-B
X
Robin Naylor, Department of
Economics, Warwick
18
Introduction
Key Concepts
•
•
•
•
•
•
•
•
•
•
Scarcity
Wants
Opportunity Cost
Trade-offs
Rationing
Markets
Efficiency
Equity
Constraints
Changes at the margin
Robin Naylor, Department of
Economics, Warwick
19
Introduction
Key Concepts
•
•
•
•
•
•
•
•
•
•
•
Choices
Preferences
Constraints
PPC
MRS
MRT
Optimisation
Absolute advantage
Comparative advantage
Specialisation
Trade
Robin Naylor, Department of
Economics, Warwick
20
Introduction
Self-study Questions
•
•
•
•
•
•
•
•
•
Show and explain a PPC for a country
What determines the position and shape of the PPC
Explain the concept of the MRT
Economists often argue that Choices depend on two key concepts: Preferences and
Constraints. Explain this argument.
Explain the concept of the MRS
Define ‘trade-offs’ (in terms of both preferences and constraints) and ‘Opportunity
Cost’ and explain their meanings in a diagram using the concept of the PPC.
What is meant by Absolute Advantage?
What is meant by Comparative Advantage? Explain how the concepts of
comparative advantage and of opportunity cost are related.
Show how trade and specialisation can lead to potential gains for both parties in a
trade.
Robin Naylor, Department of
Economics, Warwick
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