Economics and

advertisement
CHAPTER OUTLINE
•
•
•
CHAPTER 1
•
•
ECONOMICS AND OPPORTUNITY COST
MODELING OPPORTUNITY COST USING A PRODUCTION
POSSIBILITIES FRONTIER
ATTRIBUTES OF THE PRODUCTION POSSIBILITIES
FRONTIER
THINKING ECONOMICALLY
Kick it Up a Notch: DEMONSTRATING CONSTANT AND
INCREASING OPPORTUNITY COST
ECONOMICS: THE STUDY OF
OPPORTUNITY COST
McGraw -Hill/Irwin
© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.
McGraw -Hill/Irwin
Choices Have Consequences
Economics and Opportunity Cost
• Economics: the study of the allocation
and use of scarce resources to satisfy
unlimited human wants
McGraw -Hill/Irwin
© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.
• Opportunity Cost
– The forgone alternative of the choice made
Or
– What you would have done had you not
done what you did.
McGraw -Hill/Irwin
Figures 1-4
Building The Production Possibilities Frontier
S
M
Z
P
0
© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.
X
Y
• Scarce: not freely available and infinite
• Resources: anything we either consume directly or
use to make things that we will ultimately consume
McGraw -Hill/Irwin
© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.
Soda
Modeling Opportunity Cost Using a
Production Possibilities Frontier Definitions
• PPF: a graph which relates the amounts of different
goods that can be produced in a fully employed
society
• Model: a simplification of the real world that we can
manipulate to explain the real world
• Simplifying Assumption: an assumption that may, on
its face, be silly but allows for a clearer explanation
© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.
McGraw -Hill/Irwin
Pizza
© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.
1
S
Unattainable
X
Figure 5
Soda
Soda
A Fully Labeled Production Possibilities Frontier: The
Case When People are Different
Unattainable
(outside the curve)
Y
M
Attainable
Unemployment
(just inside the curve)
Z
Unemployment
P
0
0
Attainable
Pizza
McGraw -Hill/Irwin
© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.
(on the curve and on the inside)
McGraw -Hill/Irwin
© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.
Figure 6
Soda
Soda
A Fully Labeled Production Possibilities Frontier: The
Case When People are the Same
S
Pizza
Unattainable
X
(outside the curve)
Unattainable
Y
Attainable
M
Z
Unemployment
(just inside the curve)
Unemployment
P
0
Pizza
0
Attainable
(on the curve and on the inside)
McGraw -Hill/Irwin
© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.
Increasing and Constant Opportunity Cost
• Increasing Opportunity Cost
– Exists when the additional resources required to
produce an additional unit grows as more output is
produced.
– Likely to occur when people are different in their
skills.
• Constant Opportunity Cost
– Exists when the additional resources required to
produce an additional unit remains the same as
more output is produced.
– Likely to occur when people are identical in their
skills.
McGraw -Hill/Irwin
© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.
McGraw -Hill/Irwin
Pizza
© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.
Thinking Economically: Marginal Analysis
• Optimization Assumption: an assumption that
suggests that the person in question is trying to
maximize some objective
• Marginal Benefit: the increase in the benefit
that results from an action
• Marginal Cost: the increase in the cost that
results from an action
• Net Benefit: the difference between all benefits
and all costs
McGraw -Hill/Irwin
© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.
2
Positive and Normative Analysis
• Positive Analysis: a form of analysis that
seeks to understand the way things are
and why they are that way
• Normative Analysis: a form of analysis
that seeks to understand the ways things
should be
McGraw -Hill/Irwin
© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.
Economics Incentives
• Incentive: something that influences the
decisions we make
– Examples: prices influence the amount we
buy; taxes influence how much we work and
save
McGraw -Hill/Irwin
© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.
Logical Flaws
• Fallacy of Composition: the mistake in logic
that suggests that the total economic impact of
something is always and simply equal to the
sum of the individual parts
• Correlation = Causation: the mistake that
suggests that because two variables are
correlated that one caused the other to
happen.
McGraw -Hill/Irwin
© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.
Kick it Up a Notch
Demonstrating Increasing and
Constant Opportunity Cost
McGraw -Hill/Irwin
Opportunity Cost of going from 0 units of
Pizza to 1 unit of pizza
10
9
8
7
6
5
4
3
2
1
0
Opportunity Cost of going from 1 unit of
Pizza to 2 units of pizza
Production Possibilities Frontier
Opportunity Cost of going from 2
units of Pizza to 3 units of pizza
1
2
Figure 8
Illustrating Constant Opportunity Cost
Soda
Soda
Figure 7
Illustrating Increasing Opportunity Cost
© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.
Opportunity Cost of going from 1 unit of
Pizza to 2 units of pizza
Production Possibilities Frontier
Opportunity Cost of going from 2
units of Pizza to 3 units of pizza
1
2
3
Pizza
Pizza
McGraw -Hill/Irwin
Opportunity Cost of going from 0 units of
Pizza to 1 unit of pizza
9
8
7
6
5
4
3
2
1
0
3
© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.
McGraw -Hill/Irwin
© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.
3
Download
Related flashcards
Create flashcards