Microeconomics

UNIT: I

Micro Terms

Economic Perspective: The economic viewpoint which society is viewed.

Scarcity: lacking the resources required to meet needs

Factors of production: Basic economic resources

Land: physical place, gifts from nature (oil, etc)

Capitol: manmade items on land (infrastructure)

Labor: physical and mental talents of people.

Entrepreneurial ability: vision for opportunity

COMMON SENSE = ECONOMIC SENSE

Micro Terms (cont’d)

Choices: decisions made when unlimited wants meet limited means

Full employment (of resources): using all economic resources fully

Full production (of resources): using things to full efficiency; stresses efficiency

Productive efficiency: make product as cheap as possible (black highlighter)

Allocative efficiency: how to cheaply produce what people want (colored highlighters)

Opportunity cost: value of forgone activity

Law of increasing opportunity cost: as time goes on, the value of opportunity cost gets greater.

Micro Terms (cont’d)

Production Possibilities Table (PPT): Combinations of two goods that can be produced or purchased.

Production Possibilities Curve (PPC): Graphic representation of the combination of two goods that can be produced or purchased.

Consumer goods: satisfy immediate need (like pizza ingredients).

Capital goods: investment that benefits you down the line (like pizza oven).

Absolute advantage: One country can make more of a product than another country (who makes most at full employment).

Comparative Advantage: One country has a lower opportunity cost of producing a good than another country (who benefits most from trade).

“The Economic Way of Thinking”

1. Everything has a cost. (Opportunity cost included)

2. People choose for good reasons. (May not be good to you, but is to them)

3. Incentives matter. (like a bribe)

4. People create economic systems to influence choices and incentives. (not like controlled economies)

5. People gain from voluntary trade. (both people win)

6. Economic thinking is marginal thinking. (look at sections, not averages)

7. The value of a good or service is affected by people’s choices. ( value goes down if people won’t buy)

8. Economic actions create secondary effects. (other things result, acts as a catalyst)

9. The test of a theory is its ability to predict (predict based on past action)

PPC’S

PPC: Increasing

PPC: Constant PPC: Zero

Consumer goods

Capit

al goods

*types follow opportunity cost of situation.

Specialization & Trade

Products A B C D E

Avocados 0 20 24 40 60

Soybeans 15 10 9 5 0

MEXICO

Products A B C D E

Avocados 0 30 33 60 90

Soybeans 30 20 19 10 0

UNITED STATES

Specialization & Trade

Absolute Advantage = U.S. At full employment (when one variable is 0) the

U.S. can make more of a product than Mexico.• U.S. = 30 soybeans Mexico = 15• U.S. = 90 avocado Mexico = 60

Specialization & Trade

Comparative Advantage For Avocado = Mexico

For every gain of 4 avocados, Mexico only loses 1 soybean.

The U.S. only gets 3 avocados for the same price of 1 soybean.

Comparative Advantage For Soybeans = U.S.

For every gain of 1 soybean, the U.S. must spend 3 avacado

Mexico must spend 4 avacado in order to gain 1 soybean.Use chart columns B & C to observe

these statistics!

Economies

Essential Questions: #1- Who directs the economic activity? #2- Who owns the means of production?

Traditional Economy

Traditional Economy- economic activity is based on precedent. No change over time; produced for years the

same way Collective communitarian use of barter:

-> trade something else of value; not dealing with money Examples:

Native American culture (trade corn for wheat, etc.)

History (traditional groups) own and direct economic activity

Command Economy

Command economy- associated with communism; government directs essential authority, they decide what they will buy. Determine what people have access to Controls means of production, they produced what THEY

felt necessary Economic freedom is replaced by economic security

Example: Soviet 5 year plans (past)- all used to build them/ make them

industrialized; allowed to say if you didn’t make your good, you’re sent to camp so people can get things done. Whole country works around this plan/goal.

China’s (ED2) (present)- if they didn’t make changes they would cease as a government and people would rebel

Market Economy

Market economy- people direct the economic activity People buy products, so you control it Private individuals own means of production

Circular Flow DiagramM

oney income (wages, rents

Labor, land, capital, entrepreneurial ability

Goods

and

ser

vice

s

Consu

mpt

ion

expe

nditu

resG

oods and services

Revenue

Costs

reso

urces

Produced

Gained

More on Market Systems

Invisible hand (Smith)- idea that if left alone, economic activity governs itself (through incentives)

Efficiency: forces businesses to produce & sell goods in the least costly way (if their price is too high, consumer will just buy it somewhere else!)

Incentives: Reason for doing something (saving money, saving time, etc)

Freedom: ability to make our own choices

Transactions

Transaction- event at which a good or service is traded for money (normally between two people)

Externalities- How 3rd parties are impacted in a transaction Negative externality/spillover cost: 3rd part is

adversely affected & has to pay part of the cost (like people paying for pollution that don’t buy products that produce it)

Positive externality/ spillover benefit: 3rd party benefits from a transaction (like person who admires a neighbor’s flowers, but doesn’t make or buy the flowers being admired)

Last of Micro Terms

Property rights- Your ability to protect what it yours.

Bargaining- Make a deal or a compromise between parties.

Cost-benefit analysis- decision making process (like a pros and cons list)

Marginal cost- cost of the next unit of a good or decision

Marginal benefit- extra satisfaction received from the next unit of a good or decision

STOPPING POINT: MARGINAL COST = MARGINAL BENEFIT

END OF UNIT I