introduction to micro-economics chapter one.ppt

this presentation is about introduction to micro-economics

1. Economic Issues and
Concepts
Lecture 1
Edward Masoambeta
[email protected]

2. Learning Outcomes
Modern market economy uses price signals to solve the complex problems
involved in using resources to produce goods and services that people want.
The choice between competing demands for scarce resources.

3. Learning Outcomes
Interaction between production, employment, and consumption decisions.
Market economy generally delivers outcomes desired by consumers.
Governments step in when markets fail to produce results that are regarded as
successful.

4. ECONOMIC ISSUES AND CONCEPTS
TheComplexityoftheModernEconomy
Amarketeconomyisself-organizinginthesensethat
whenindividualsactindependentlytopursuetheirown
self-interest,respondingtopricessetonopenmarkets,
theyproduceco-ordinatedandrelativelyefficient
economicactivity.

5. ECONOMIC ISSUES AND CONCEPTS
ResourcesandScarcity
Scarcityisafundamentalproblemfacedbyall
economiesbecausenotenoughresources-land,labour,
capital,andentrepreneurship-areavailabletoproduce
allthegoodsandservicesthatpeoplewouldliketo
consume.
Scarcitymakesitnecessarytochooseamongalternative
possibilities:whatproductswillbeproducedandinwhat
quantities.

6. Theconceptofopportunitycostemphasisesscarcityand
choicebymeasuringthecostofobtainingaunitofone
productintermsofthenumberofunitsofotherproductsthat
couldhavebeenobtainedinstead.
Aproduction-possibilityboundaryshowsallofthe
combinationsofgoodsthatcanbeproducedbyaneconomy
whoseresourcesarefullyemployed.
Movementfromonepointtoanotherontheboundaryshowsa
shiftintheamountsofgoodsbeingproduced,whichrequiresa
reallocationofresources.
ECONOMIC ISSUES AND CONCEPTS

7. WhoMakestheChoicesandHow
Moderneconomiesarebasedonthespecializationanddivisionof
labour,whichnecessitatetheexchangeofgoodsandservices.
Exchangetakesplaceinmarketsandisfacilitatedbytheuseof
money.
Muchofeconomicsisdevotedtoastudyofhowmarketsworkto
co-ordinatemillionsofindividual,decentralizeddecisions.
Threepuretypesofeconomycanbedistinguished:traditional,
command,andfreemarket.
Inpractice,alleconomiesaremixedeconomiesinthattheir
economicbehaviourrespondstomixesoftradition,government
command,andpriceincentives.
ECONOMIC ISSUES AND CONCEPTS

8. Governmentsplayanimportantpartinmodern
mixedeconomies.
Theycreateandenforceimportantbackground
institutionssuchasprivateproperty.
Theyintervenetoincreaseeconomicefficiencyby
correctingsituationswheremarketsdonoteffectively
performtheirco-ordinatingfunctions.
Theyalsoredistributeincomeandwealthinthe
interestsofequity.
ECONOMIC ISSUES AND CONCEPTS

9. Unattainable combinations
Production possibility
boundary
Quantity of public sector goods
A Production-Possibility Boundary
0
Attainable
combinations

10. Production possibility
boundary
Quantity of public sector goods
c
0
g
00
a
Attainable
combinations
Unattainable combinations
A Production-Possibility Boundary

11. Production possibility
boundary
c
1 b
•d
c
c
0
Attainable
combinations
0
a
g
0 g
1
Quantity of public sector goods
Unattainable combinations
A Production-Possibility Boundary

12. Production possibility
boundary
c
0
g
0
c
1 b
•d
c
g
1
C
G
Attainable
combinations
Quantity of public sector goods
0
a
Unattainable combinations
A Production-Possibility Boundary

13. A production-possibility boundary
Thequantityofpublicsectorgoodsproducedismeasuredalongthehorizontalaxis.
Thequantityofprivatesectorgoodsismeasuredalongtheverticalaxis.
Anypointonthediagramindicatessomeamountofeachkindofgoodproduced.
Theproduction-possibilityboundaryseparatestheattainablecombinations,suchasa,b,andc,
fromunattainablecombinations,suchasd.
Pointsaandbrepresentefficientusesofsociety’sresources.
Pointcrepresentseitheraninefficientuseofresourcesorafailuretousealltheresourcesthat
areavailable.

14. A production-possibility boundary
Theboundaryisnegativelyslopedbecauseinafullyemployedeconomymoreofonegoodcan
beproducedonlyifresourcesarefreedbyproducinglessofothergoods.
Movingfrompointa(withcoordinatesc
0andg
0)topointb(withcoordinatesc
1andg
1)implies
producinganadditionalamountofpublicsectorgoods,indicatedbyGinthefigure
TheopportunitycostofthisincreaseinGisareductioninprivatesectorgoodsbytheamount
indicatedbyC.

15. The effect of economic growth on the
production possibility boundary
Economicgrowthshiftstheboundaryoutwards.
Somecombinationsofgoodsthatwere
previouslyunattainablebecomeattainable.

16. Quantity of public sector goods
0
The Effect of Economic Growth on the Production-
Possibility Boundary
Production possibility
boundary before growth

17. Production possibility
boundary after growth
Quantity of public sector goods
0
a
b
d
Production possibility
boundary before growth
The Effect of Economic Growth on the
Production-Possibility Boundary

18. Goods Market
Factor Market
Individuals
(consumers)
Firms
(producers)
The Circular Flow of Income and
Expenditure

19. The Circular Flow of Income and
Expenditure
Goods Market
Factor
Market
Individuals
(consumers)
Firms
(producers)

20. The circular flow of income and expenditure
Theyellowlineshowstheflowsofgoodsandserviceswhilethewhitelineshowsthepayments
madetopurchasethese.
Factorservicesflowfromindividualswhoownthefactors(includingtheirownlabour)through
factormarketstofirmswhousethemtomakegoodsandservices(yellowarrow).
Thegoodsandservicesthenflowthroughgoodsmarketstothosewhoconsumethem(yellow
arrow).
Moneypaymentsflowthroughfactormarketsfromfirmstoindividuals(whitearrow).
Whenindividualsspendthisincomebuyinggoodsandservices,moneyflowsthroughgoods
marketsbacktoproducers(whitearrow).

21. Absolute Advantage
Time spent fully
producing one
or the other
Sweaters Suits
Peter
Jane
Total
either
100
400
either
or
40
or
10

22. Absolute Advantage
Time spent fully
producing one
or the other
Time divided equally
between producing the
two products
Sweaters Suits Sweaters Suits
Peter
Jane
Total
either
100
400
either
or
40
or
10
50 20
200 5
250 25

23. Absolute Advantage
Time spent fully
producing one
or the other
Time divided equally
between producing the
two products
Full Specialization
Sweaters Suits Sweaters Suits Sweaters Suits
Peter
Jane
Total
either
100
400
either
or
40
or
10
50 20 - 40
200 5 400
-
250 25 400 40

24. Absolute advantage
Thefirstcolumnsshowthat,workingfulltimeonhisown,Petercan
produceeither100sweatersor40suitsperyear,whereasJanecan
produce400sweatersor10suits.
ThusJanehasanabsoluteadvantageinproducingsweatersand
Jacobhasanabsoluteadvantageinproducingsuits.
Thesecondcolumnsshowtheoutputsiftheybothspendhalftheir
timeproducingeachcommodity.
ThethirdcolumnsshowtheresultswhenPeterspecializesinsuits,
producing40ofthem,andJanespecializesinsweaters,producing
400.
Sweatersproductionrisesfrom250to400,whilesuitsproduction
goesfrom25to40.

25. Comparative Advantage
48
Time spent fully
producing one
or the other
Peter
Jane
Total
either
100
400
either
or
40
or
Sweaters Suits

26. Comparative Advantage
48
24
44
Time spent fully
producing one
or the other
Time divided equally
between producing the
two products
Peter
Jane
Total
either
100
400
either
or
40
or
50 20
200
250
Sweaters Suits Sweaters Suits

27. Comparative Advantage
48
24 12
44 300 52
Time spent fully
producing one
or the other
Time divided equally
between producing the
two products
Full Specialization
Peter
Jane
Total
either
100
400
either
or
40
or
50 20 - 40
200 300
250
Sweaters Suits Sweaters Suits Sweaters Suits

28. Comparative advantage
ThefirstcolumnsinthetableshowthatJaneismoreproductivethanPeterinbothsuitsand
sweaters.
ComparedwithPeter,Janeis300percentmoreefficientatproducingsweatersand20percent
moreefficientatproducingsuits.
ThesecondcolumnsgivetheoutputswhenPeterandJaneeachdividetheirtimeequallybetween
thetwoproducts.
ItispossibletoincreasethecombinedproductionofbothcommoditiesbyhavingJaneincrease
herproductionofsweatersandPeterincreasehisproductionofsuits.
ThethirdcolumngivesanexampleinwhichPeterspecializesfullyinsuitsproductionandJane
spends25percentofhertimeonsuitsand75percentonsweaters.
Totalproductionofsweatersrisesfrom250to300,whiletotalproductionofsuitsgoesfrom44to
52.

29. Comparative advantage
Thisexampleisonlyanillustration.Theprinciplescan
begeneralizedinthefollowingway.
Absoluteefficienciesarenotnecessaryfortheretobegainsfromspecialization.
Gainsfromspecializationoccurwhenevertherearedifferencesinthemarginof
advantageoneproducerenjoysoveranotherinvariouslinesofproduction.
Total production can always be increased when each
producer becomes more specialized in the
production of the commodity in which it has a
comparative advantage.