Microeconomics Introduction © 1999 Michigan State University. All rights reserved.

Introductionslide 2 Economics Economics is the study of how society manages scarce resources. Human resources (labor) Natural resources (land) Manufactured resources (capital)

Introductionslide 3 Resources are scarce, not free.

Introductionslide 4 Managing resources is making choices.

Introductionslide 5 EXAMPLES OF SOME CHOICES ECONOMISTS HAVE ANALYZED Whether to buy a car this week. Whether to have pizza for dinner tonight, or something else. Whether to marry your sweetheart. How hard to study for this course. Whether to go to college, and if so, which one. Whether to buy a lottery ticket in the Michigan lottery.

Introductionslide 6 Factors in decision making, or making choices 1.Making decisions at the margin. 2.People face tradeoffs. 3.Opportunity cost. 4.People respond to incentives.

Introductionslide 7 OPPORTUNITY COST EXPLAINED The opportunity cost of doing something is what you must give up in order to do it. The cost of a pizza is what you must give up to consume it, which in this case is easily computed in money. The cost of a college education includes both money and other foregone alternatives. For example, the cost of a year at MSU includes not only tuition and books, but the income you could have earned working on a full time job. The cost of attending a Lugnuts baseball game includes the value of the time you could have spent studying economics.

Introductionslide 8 AN ECONOMIC MODEL The Production Possibility Curve Purposes of model Show scarcity constraint Illustrate economic efficiency Introduce opportunity cost concept Variables Quantities of goods that may be produced Givens Total amounts of inputs available Technology of production

Introductionslide 9 PPF DEFINED The Production Possibility Curve (or frontier) shows the maximum amount of a good you can produce given the amounts of other goods produced, and given the total amounts of inputs available, and given the technology of production.

Introductionslide 10 PPC EXAMPLE Assumptions: There are only two goods, Pepsi and MSU flags. There are limited inputs and given technology of production. Definition: The PPC shows the maximum amount of flags you can produce, given the amount of Pepsi to be produced.

Introductionslide 11 Data On Production Possibilities point MSU flagsPepsi A09 B18 C25 D30

Introductionslide 12 The Production Possibilities Curve MSU flags Pepsi A B C D

Introductionslide 13 The Production Possibilities Curve MSU flags Pepsi A B C D  E Unattainable

Introductionslide 14 Computing Opportunity Cost MSU flags Pepsi A B C D

Introductionslide 15 Opportunity costs increase as more of a good is produced. Reason: Resources are not perfect substitutes for each other.

Introductionslide 16 PPC EXAMPLE Assumptions: There are only two goods, pizza and spaghetti. There are limited inputs and given technology of production. Definition: The PPC shows the maximum amount of pizza you can produce, given the amount of spaghetti to be produced.

Introductionslide 17 PRODUCTION POSSIBILITY CURVE SPAGHETTI PIZZA Which points are attainable and which points are unattainable? Which points are attainable and which points are unattainable? Go to hidden slide

Introductionslide 18 PRODUCTION POSSIBILITY CURVE SPAGHETTI PIZZA attainable unattainable

Introductionslide 19 PRODUCTION POSSIBILITY CURVE SPAGHETTI PIZZA What’s the effect of an improvement in the technology for producing spaghetti? What’s the effect of an improvement in the technology for producing spaghetti? Go to hidden slide

Introductionslide 20 SPAGHETTI PIZZA An improvement in spaghetti technology

Introductionslide 21 PRODUCTION POSSIBILITY CURVE SPAGHETTI PIZZA What’s the effect of an increase in total resources (inputs)? What’s the effect of an increase in total resources (inputs)? Go to hidden slide

Introductionslide 22 Effect of an increase in resources. SPAGHETTI PIZZA

Introductionslide 23 Points “inside” the PPC are inefficient. For any point “inside” there corresponds some point that represents more production of both goods. Note that while points on the PPC are efficient, we cannot say at this time whether some are better for society than others.