Microeconomics Unit 1 Basic Economics Concepts

Microeconomics Unit 1: Basic Economics Concepts Key Terms- Define the following: 3 Economic Systems 1. Scarcity 1. Centrally Planned Economies Individuals, businesses, and governments have Economic system where the government owns the unlimited wants but limited resources. resources and decides what to make, how to make 2. Consumer Goods vs. Capital Goods it, and who gets it. Total government control of the Consumer goods- (ex: pizza) goods made for direct economy consumption 2. Free-Market Economies (Capitalism) Capital goods- (ex: restaurant oven) goods made for Economic system where individual citizens own indirect consumption. Goods that make consumer goods the resources and decides what to make, how to 3.Trade-offs make it, and who gets it. Little or no government ALL possible options given up when you make a choice involvement in the economy 4. Opportunity Cost 3. Mixed Economies The ONE best option given up when you make a choice Almost all economies are a mixture of the above including the money, time, and forgone opportunities. systems. Production Possibilities Curve (Frontier) Use the chart to create a PPC to the right. Shoes Calculate the 30 Opportunity Cost: A B C D E A→B: 1 Shoe 25 Z= Impossible Hats 0 1 2 3 4 B→C: 4 Shoes Shoes 30 29 25 15 0 E→D: 1 Hat 20 C→A: 2 Hats Label the following three points on the 15 graph: X= Unemployment/Inefficiency 10 X= Inefficient Y= Efficient Y= Efficient (on the curve) Z= Impossible given current resource 5 0 Constant Opportunity Cost Why does this occur? Resources are easily adaptable between both products. Draw the graph below Bicycles 6 A 2 4 B As more tricycles are made, resources that are easily adaptable to producing either good are moved away from bicycles and towards tricycles. Opportunity cost for each tricycle is constant at 2 bicycles. 1 3 4 Hats Increasing Opportunity Cost Why does this occur? Resources are not easily adaptable between both products Draw the graph below 3 5 2 Bikes A 20 B 17 12 2 C C 2 12 2 1 2 D 3 Tricycles 1 2 At combination A, all resources are put towards making bikes, including resources that are better for making iPhones. The opportunity cost of the first iPhone is small (3 bikes) as resources, like electrical engineers, are moved away from making bikes. As more iPhones are produced, the opportunity cost gets larger. 3 D iPhones Efficiency Shifting the PPC Identify the three shifters of the PPC Difference between allocative and productive efficiency: 1. Change in resource quantity or quality Productive Efficiency- Products are being produced 2. Change in Technology in the least costly way (any point ON the curve) 3. Change in Trade (DoesnÕt change the amount they Allocative Efficiency- The products being produced can produce, but it does change the amount they can are the ones most desired by society. Optimal point consume) depends on the desires of society. Production Possibilities Practice (draw 3 PPCs with pizza and cars) Scenario: Workers loose their jobs Scenario: Increase in consumer Scenario: More resources that due to a recession demand for pizza improve the production of cars Pizza Pizza Pizza The curve The curve doesnÕt shift. It is just a point inside the curve B doesnÕt shift. Only the combination A changes Cars Cars Absolute and Comparative Advantage Output Questions Input Questions The table shows the amount of sugar and cars each country can make with the same number of resources Only car production is improved Cars The table shows the number of hours it takes to produce a ton of sausage and a ton of computers Sugar (tons) Cars Sausage Computers 40 10 2 6 Cuba Canada (1S costs ¼ Car) (1C costs 4 Sugar) (1S costs 1/3 comp) (1C costs 3 sausg) 50 100 10 10 Mexico UK (1S costs 2 Cars) (1C costs ½ Sugar) (1S costs 1 comp) (1C costs 1 sausg) 1. Which country has an absolute advantage in sugar? 1. Which country has an absolute advantage in How about cars? Mexico/Mexico sausage? How about computers? Canada/Canada 2. What is CubaÕs opportunity cost for producing one 2. What is CanadaÕs opportunity cost for producing one car? 4 sugar computer? 3 sausage 3. Which country has a comparative advantage in 3. Which country has a comparative advantage in cars? How about sugar? Mexico/Cuba computers? How about sausage? UK/Canada 4. For both countries to benefit from trade, how much 4. For both countries to benefit from trade, how many sugar can be traded for each car? 1 Car for sausages can be traded for each computer? 1 comp 1 Sugar (any number between 4 and ½) for 2 sausage (any number between 3 and 1) Circular Flow Matrix (Model) Product Market- Places where individuals buy goods Draw the Circular Flow Matrix and services from businesses Factor (Resource) Market- Places where businesses buy the factors (land, labor, capital) from individuals Factor Payments- Payments made by businesses. Rent for land, wages for labor, interest for capital Transfer Payments- Payments made by the government to meet a specific goal rather than pay for goods and services (ex: welfare)