Transcript AP pp1-revx

Chapter 1
Limits, Alternatives &
Choices
The Economic Perspective
or way of looking at
something involves 3 key
aspects.
1. Scarcity & Choice
Scarcity means that our
economic wants exceed the
productive resources available to
meet those wants and as a result
we are forced to make choices.
The basic idea is that we can’t
have everything we want, not
individually or as a society.
Economics: Is concerned with the
efficient use and management of
limited productive resources to
achieve maximum satisfaction of
human material wants.
Notice it is simply a restatement of
our scarcity problem.
TINSTAAFL: There is no such
thing as a free lunch. The true
cost of any good or service is
the other things we could have
had if those resources had been
used somewhere else.
Resources have alternative uses
and therefore society must give
up something in order to get
something else.
What do we call the thing we
have to give up?
Opportunity Cost: represents the next
best alternative which is given up when
a choice is made. ( opportunity cost =
opportunity lost)
ex. Robots vs. pizza
Study or go on a date
Play football or take an after school
job
2. Purposeful Behavior
Assumes that human behavior
reflects rational self-interest. In
weighing the costs and benefits
of their actions people act
rationally as opposed to
randomly and seek to pursue
what is best for them.
Adam Smith: “It is not from the
benevolence of the butcher,
baker or brewer that we expect
our dinner, but from their
regard to their own self
interest.”
3. Marginal Analysis
When making decisions
people focus primarily on
changes in the status quo by
comparing the marginal
benefits of an action with its
marginal cost.
Marginal = additional or extra
We can use a decision making
grid to evaluate the alternative
choices that people face.
Ex. P = problem
A = alternatives
C = criteria
E = evaluate
D = decide
Economists develop theories,
principles and models to help
explain economic behavior.
There are 3 noteworthy things
to remember.
The theories, principles and
models are generalizations that
are expressed as the tendencies
of typical or average consumers,
workers, or business firms.
Ceteris paribus, or other
things equal assumes that all
variables except those under
immediate consideration are
held constant. This allows
economists to focus on the
relationship between 2 variables
without being confused by
changes in other variables.
Graphical expressions are used
many times to illustrate how a
particular model works. Make
sure to pay attention to the key
graphs throughout the
textbook.
Price
D
Qty.
Microeconomics: deals with
decision making by individual
consumers, workers and
business firms. Here supply and
demand in individual markets is
our main focus. (trees)
Macroeconomics: looks at the
economy as a whole or its basic
subdivisions or aggregates such
as government, households or
business sectors which make up
the economy. (forest)
Society has limited or scarce
economic resources that are
used to produce goods and
services. Resources can also be
called factors of production or
inputs.
1) Land: is also called natural
resources or gifts of nature.
Examples would include
forests, minerals, oil
deposits, water, animals,
birds and sunlight.
2) Labor: consists of all the
physical and mental efforts
that workers contribute to
the production process.
3) Capital: includes all
manufactured aids used to
produce consumer goods
and services. The term
investment is used to
describe business spending
on capital goods.
Consumer goods satisfy wants
directly whereas capital goods
do so indirectly by aiding the
production of consumer goods.
Note: capital in this context
does not mean money or
financial capital.
4) Entrepreneurship: This is
the risk taker in search of
profits. These are people
who start new businesses
or come up with new ways
of doing things.
Production Possibilities
Curve/Frontier
This model will help illustrate
some basic lessons about how
our economy works, but first
we must make 4 simplifying
assumptions.
Full employment- the economy is using
all of its available resources as efficiently
as possible.
Fixed resources- the quantity and
quality of our resources are fixed at a
given point in time.
Fixed technology- our methods used to
produce output is constant.
Two goods- We are producing only 2
goods.
Full employment implies 2 types of
efficiency.
Allocative efficiency: Resources are
devoted to the goods most wanted
or valued by society.
Productive efficiency: The least cost
production methods are used to
produce wanted goods and
services.
Here are the basic lessons this
model teaches.
All points on the curve are
equally efficient however this
model can’t tell us the optimal
or best combination of each
good. (pts. A-C)
Any point inside the curve is
inefficient such as point (E).
This could be caused by a
recession or depression.
Any movement along the
curve involves an opportunity
cost such as (A) to (B), (B) to
(C), or back again. You must
give up units of one good in
order to get more units of the
other good.
The PPC is concave or bowed
from the point of origin because
as more units of one good are
produced you must give up larger
and larger units of the other
good.
This is called the law of
increasing opportunity cost
and the reason for it is due to
the fact that economic
resources are not completely
adaptable to alternative uses.
Any point currently outside the
curve such as point (D) is
unattainable because of fixed
resources and fixed technology.
The only exception to this would
be trade.
Outward shifts in the curve
over time represent economic
growth. See panel C above.
This could be achieved by
having more resources, better
quality resources, better
technology or more capital
goods.
Unemployment, Growth and the Future
Does the economy always operate at full
employment or on the curve? Obviously
not! Our analysis and conclusions can
change when we relax 1 or more of our
assumptions, say that resources are no
longer fully employed. Graphically, we can
illustrate that situation with point E above.
Notice there are 3 possible paths back to
full employment with greater output of one
or both products.
A Growing Economy
When we drop the assumptions that
the resources and technology are no
longer fixed, the PPF shifts positions
and the potential maximum output of
the economy changes. Whereas a static,
no growth economy must sacrifice
some of 1 good to obtain more of
another, a dynamic, growing economy
can have larger quantities of both
goods.
Nations that devote more
resources to capital goods
production instead of
consumer goods will
experience a more rapid rate of
economic growth in the future.
See Presentville vs. Futureville
Presentville
Consumer
goods
A
Capital goods
Futureville
Consumer
goods
A
Capital goods
A Qualification: International Trade
The PPF implies that an individual
nation is limited to the combination of
output on its own curve. We will see
later that an economy can circumvent
the output limits imposed by its
domestic PPF. With trade each nation
specializes in those goods for which it
has the lowest opportunity cost.
Trade allows a nation to get more
of a desired good at less sacrifice
of some other good.
Specialization and trade have the
same effect as having more or
better resources or discovering
improved production techniques.