Welcome to the exciting World of Microeconomics

Chapter 1: Introduction to Economics The Economic Problem Opportunity Cost Production Possibility Frontiers This series of slides will introduce some key concepts to students – the economic problem, opportunity cost and production possibility frontiers.

What is Economics? Nobel Prize Laureate Paul Samuelson's definition is as follows: “Economics is the study of how societies use scarce resources to produce valuable commodities and distribute them among different people.”

Microeconomics – studies the interaction of individual components, the consumers and producers in the market; e.g., demand and supply, elasticity, costs of production of businesses. www.eportfolio.lagcc.cuny.edu/.../SSE103.html

Macroeconomics – studies the functioning of the economy as a whole; e.g., taxation, Government spending, and changes in the money supply, interest rates, inflation rates and exchange rates. http://www.obamatoon.com/photos/uncategorized/2008/11/16/20081120obamatoon01.jpg

Normative vs. Positive Economics Positive Economics – Describes facts in the economy. For example: Inflation is caused by an increase in the aggregate demand for goods and services. Normative Economics – involves value judgments. For example: The government should tax higher income earners more than lower income earners.

What is the difference in the following statements? Arabianbusiness.com Friday, 29 August 2008 The dirham should be de-pegged immediately," said Khalaf Al-Habtoor, chairman of conglomerate Al-Habtoor Group."The implications of the dollar peg have really begun to affect business and markets." http://www.arabianbusiness.com/505874-depeg-immediately-urge-uae-businesses The UAE is among four states in the GCC - including Saudi Arabia, Qatar and Bahrain - that are maintaining dollar pegs until they negotiate a single currency as early as 2010. http://www.arabianbusiness.com/516145-uae-fx-committee-recommends-sticking-with-dlr-peg

Examine these pictures

The Fundamental Economic Problem Unlimited Wants Scarce Resources Discussion can take place here about the key elements of the economic problem – the unlimited wants of humans against the scarce resources that exist to meet those wants. The notion of supply and demand can be introduced here and students can be involved by making a list of all the things they would like to buy if they had unlimited amounts of money! If then asked to trim that list down to meet a budget the more outrageous items disappear. This then introduces the notion of having to make choices – this issue can be discussed further using examples drawn from students own experiences about the choices they have had to make – possibly involving the choice of subjects they have had to make at college or school in relation to the time available etc! How we use our scarce resources can also be linked into this discussion. The wind turbines highlight an issue raised in the In the News section (http://www.bized.ac.uk/cgi-bin/chron/chron.pl?year=2003&locale=uk&quart=0 - 14th July) about the intention to build wind farms in areas of the UK and the controversies that it creates – useful to link theory and practice at an early stage.

TROPICAL TROUBLE EXERCISE

Three Fundamental Questions of Economics What goods and services should an economy produce? – should the emphasis be on agriculture, manufacturing or services, should it be on sport and leisure or housing? How should goods and services be produced? – labour intensive, land intensive, capital intensive? Efficiency? Who should get the goods and services produced? – even distribution? more for the rich? for those who work hard? This is the traditional three key questions any economic system has to answer. Many students would have difficulty defining what an ‘economy’ actually is! It is useful at this stage to clear this up – a system for the production and exchange of goods and services to satisfy the wants and needs of the population. This is open ended enough to be able to incorporate all manner of economic systems from a barter system that still exists in remote parts of the world to sophisticated economic systems such as the UK and US! The questions and the examples raised can be used for discussion – get the students to express their views at this stage and be as controversial as possible to stimulate discussion and involvement!

The Three Basic Economic Questions How does a market economy decide: WHAT to produce? HOW to produce the goods and services? FOR WHOM to produce the goods and services?

Factors of Production Factors of production are the inputs or resources used to produce output (goods and services).

Land anything that comes from the geographical surface of the earth. Land’s reward is rent.

Labor all the mental and physical effort used in producing goods and services Labor’s reward is wages.

Capital all man-made resources used to produce goods and services. Capital’s reward is interest.

Enterprise the individual(s) who come up with the business idea, take the risk and organize the other factors. Enterprise’s return is profit.

The workings of a Market Economy How do businesses decide: WHAT to produce? HOW to produce the goods and services? WHO gets the goods and services?

The Circular Flow of Income Model

Circular Flow of Income with Government and International Trade

Choice and Opportunity Cost

Opportunity Cost Opportunity Cost is the best , or most valued, alternative you give up when making an economic decision. This is a key concept and one that often causes problems and misunderstanding but is central to students thinking like an economist. The crucial thing to knock out of students is their thinking that everything costs ‘money’. Because we have to make choices there are issues surrounding value judgements about what is important and what is not – it should not be difficult to stimulate discussion about what issues of government spending are important and what are not!

Choice? Opportunity cost?

Choice? Opportunity Cost?

Choice? Opportunity Cost?

Choice? Opportunity Cost?

Production Possibilities Curves (PPC) A PPC shows the combinations of goods and services that an economy can produce using all its resources fully.

EUROLAND’S PPC Euro Land's PPC Production Possibilities A B C D E Cars (000) 16 12 8 4 Mobile phones (000) 24 36 48

Constant Opportunity Cost & PPC EURO LAND’S PPC - A straight line PPC shows constant opportunity cost. CARS (000s) 8 C D 4 Mobile Phones (000s) 24 36

PPC & Constant Opportunity Cost

JAPAN’S PPC Japan's PPC Production Possibilities A B C D E F Capital Goods (000) 1 2 3 4 5 Consumer Goods (000) 500 475 425 325 175

PPC & Increasing Opportunity Cost : JAPAN’S PPC Capital Goods (000s) 3 D These slides introduce the diagrams and then have animation to show how points on the PPF relate to different resource use and allocation. Moving from point A to point B involves sacrificing some capital goods to gain more consumer goods and thus demonstrates the opportunity cost involved. Students doing history can be reminded about the resource allocation decisions taken by Stalin during the 1930s and the subsequent decisions by successive Soviet premiers since the war about what resources are important for a nation like the USSR! (you might of course have to explain a little bit about what the USSR was!) 2 C Consumer Goods (000s) 325 425

Discuss the points and the following PPC

Why is the PPC bowed out from the origin? The PPC is bowed out from the origin b/c of increasing opportunity cost. Opp cost increases b/c to get more of one good an econ. has to give up more and more of the other good b/c resources are NOT equally efficient at producing both goods.

PPC and Economic Growth Improve quality of resources; i.e., training & education Increase quantity of resources;i.e., discovery of new oil reserves Technology to increase productivity Increase # of women in the workforce More Research & Development (R & D) Produce more capital goods today

PPC and Economic Growth Capital Goods C Y1 A Yo .B The next slide allows the lecturer to demonstrate what happens when resources are not used efficiently and production takes place within the PPF. It then allows the expansion of the PPF and an be used to illustrate the issue of economic growth and where opportunity cost does not exist if the economy moves from point A to point C(in a simple context of course – there is always some form of sacrifice of using resources!) Xo X1 Consumer Goods

BENEFITS OF TRADE Trade between nations allows countries to OBTAIN combinations of resources that are greater than they can produce. Trade does NOT mean economic growth.

Summary: Production Possibility Frontiers Show the different combinations of goods and services that can be produced with a given amount of resources No ‘ideal’ point on the curve Any point inside the curve – suggests resources are not being utilised efficiently Any point outside the curve – not attainable with the current level of resources Useful to demonstrate economic growth and opportunity cost This slide introduces the key features about PPFs. The activity that accompanies this presentation seeks to apply PPFs in a slightly different way – focussing on using health resources. Going through the theory at this stage and then following it up with the activity will be useful in developing early understanding of the issues.

1) Complete the Problems for LO1 Review 1) Complete the Problems for LO1 2) Applying your Knowledge and Understanding Read the passages and: Look up any new vocabulary words. Apply the concepts learned in LO1 The final slide introduces positive and normative statements. Definitions are given on the right hand side and then successive statements appear on the left – each of these can be used as a basis of discussion as to whether they are positive or normative statements and why!

Production Possibilities REVIEW PROBLEMS Review Problem Production Possibilities Cars x-axis Computers y-axis A 16 B 12 C 8 28 D 4 36 E 40