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Unit 1: Microeconomics, Scarcity, Characteristics of market economies,…
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Scarcity
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WWI & WWII example
During WWI and WWII, the U.S. needed to shift many resources -- people, factories and even food -- over to the war effort.
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For example, during the war effort, women were shifted in large numbers into the work force
Pandemic (2020) example
Some firms shifted from producing cars to producing ventilators, or vacuum filters to face masks, to help meet the demand.
Not the goods and services that are scarce, although they may be in short supply. It's the resources that are used to produce them.
Every time we choose to use a resource for one purpose, we cannot also use it for a competing purpose.
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For example, endangered species, virgin forests, oil, gold/silver, valuable items
Could mean shortages, like a grocery store running out of oranges
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The PPC graph
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Can show constant, increasing or decreasing opportunity costs
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Questions:
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The basic economic problem of all economies is essentially one of deciding how to make the best use of limited resources to satisfy unlimited wants.
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If we had enough resources to make everything we want, we wouldn't face choices. We wouldn't have to consider costs
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Why do we care?
If there were no scarcity, we could all have whatever we wanted. Therefore, there would be no need to trade, work to earn things.
But, because there is scarcity, we need a way to allocate resources (distribute things) in our society. That is, because of scarcity, we need economics!
Economic systems - ways of structuring society which largely determine how that production, distribution, and consumption happens.
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3 main economic systems
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Mixed economy
This is the third main economic system, and probably the most important - since it's by far the most common!
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Opportunity cost is...
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Constant, increasing or decreasing along a production possibilities curve/data set
Drawing graphs
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Must label axes, capital goods on y-axis and consumer goods on x-axis
Absolute Advantage:
the ability to produce more of a good/service than someone else, in the same amount of time
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summary 1.6.2
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Consumers attempt to maximize their utility by comparing the marginal utility per dollar of one good relative to the marginal utility per dollar of another good
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So, why trade at all?
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But wait:
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Absolute Advantage
Imagine two countries, both of which produce similar goods.
When one country can produce more of a good than the other country, we say they have the absolute advantage.
Country A has the absolute advantage because they can produce 200 while country B can only produce 50. Hence, 200 > 50
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Cost Benefit Analysis
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What is Benefit?
For Consumers...
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Ask, how much utility will this bring?
For Corporations...
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Ask, how much money will this bring in?
Main Takeaway: if Benefit >= Cost, do it!
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PPC Graphs
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PPC with increasing opportunity costs is curved away from axes, PPC with constant opportunity cost is linear. Decreasing is curved toward axes.
Comparative Advantage:
The ability to produce something at a lower opportunity cost than someone else, given the same resources
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conclusion 1.4.1:
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Trade is based on comparative advantage, which exists when an individual or nation has a lower opportunity cost in producing a good or service
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1.4.2 conclusion.
When you calculate comparative advantage, pay close attention to what the numbers in the grid represent.
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1.5.1 conclusion
Students need to understand how to identify an economic concept, principle, or model using quantitative data or calculations
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Marginal + Utility
Marginal defined:
in economics, marginal means "additional", and many decisions are made by comparing the marginal benefit and marginal costs
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1.5.2 conclusion
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Other decisions can not be broken down into increments and must be evaluated by looking at the total benefits and total costs
Overview
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Diminishing Marginal Utility - as a consumer purchases more of a good/service, the additional satisfaction falls for each additional unit.
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Cost Benefit Analysis
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Marginal benefit
For other decisions, it will be easiest to compare marginal costs and marginal benefits
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Intro
Given that resources are scarce and wants are unlimited, every economy must decide:
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Production Possibilities
What are the possible combinations of batches you could make, if you made batches until you had too few resources left to make more?
Opportunity Cost
Def: The value of the next-best option, which must be given up to go with the option being chosen.
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intro
Even if each nation (or individual) has a comparative advantage, trade isn't necessarily mutually beneficial -- That depends on the terms of trade
Terms of trade
For both to benefit, the exchange price must fall between the opportunity costs in the two nations (individuals).
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Slideshow -- Economic Basics: Scarcity, Economic Systems and the Factors of Production
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Cost-benefit Analysis, Marginal Utility, Consumer Choice
