DR. PETROS KOSMAS LECTURER VARNA FREE UNIVERSITY ACADEMIC YEAR LECTURE 4 MICROECONOMICS AND MACROECONOMICS ECO-1067

Scarcity A condition that exists when there are not enough goods or services available to meet the wants and needs of consumers A study of how to meet the unlimited wants of a society with its limited resources. ECO-1067

ECONOMIC RESOURCES (Factors of Production) Land Labor Capital Entrepreneurship

Land Natural resources Everything contained in the earth or found in the sea ECO-1067

Labour Human resources All people who work in the economy Full- and part-time workers Managers Public employees Professional people ECO-1067

Capital Money needed to start and operate a business Goods used in the production of other goods ECO-1067

Entrepreneurship Skills of people willing to take the risk of starting their own business ECO-1067

The Concept of Opportunity Cost Opportunity cost of any choice  What we forego when we make that choice Most accurate and complete concept of cost Opportunity cost of a choice includes both explicit costs and implicit costs  Explicit cost— money actually paid out for a choice  Implicit cost—value of something sacrificed when no direct payment is made ECO-1067

All production carries an opportunity cost To produce more of one thing Must shift resources away from producing something else Opportunity Cost and Society ECO-1067

Production Possibilities Frontiers (PPF) Curve showing all combinations of two goods that can be produced with resources and technology available Society’s choices are limited to points on or inside the PPF ECO-1067

Figure 1: The Production Possibilities Frontier Quantity of chocolate per Period Quantity of corn per Period 100,000200,000300,000400,000500,000 1,000, , , , , ,000 B A C D E F W At point A, all resources are used for corn Moving from point A to point B requires shifting resources out of corn and into chocolate. At point F. all resources are used for chocolate. ECO-1067

Increasing Opportunity Cost According to law of increasing opportunity cost  The more of something we produce  The greater the opportunity cost of producing even more of it This principle applies to all of society’s production choices ECO-1067

Figure 2: Production and Unemployment A B Civilian Goods per Period Military Goods per Period 2.then moved to the PPF during the war. Both military and civilian production increased. 1.Before WWII the United States operated inside its PPF... ECO-1067

Economic Growth If economy is already operating on its PPF  Cannot exploit opportunity to have more of everything by moving to it But what if the PPF itself were to change? Couldn’t we then produce more of everything?  This happens when an economy’s productive capacity grows Many factors contribute to economic growth, but they can be divided into two categories  Quantities of available resources  Technological change enables us to produce more from a given quantity of resources ECO-1067

Figure 3: The Effect of a New Technology to Produce Chocolate Quantity of chocolate per Period Quantity of corn per period 300,000500,000600,000 1,000, ,000 A J D H F More corn AND More chocolate Same corn+ More chocolate F' ECO-1067

Productivity Productivity is a measure of the efficiency with which goods and services are produced. Suppose 2 workers, A and B, are making identical articles, both of them using exactly the same equipment In a 40 hour week, Worker A produces 400 articles In a 40 hour week, Worker B produces 600 articles Worker A’s productivity = 400 articles/40 hour a weak = 10 articles per hour Worker B’s productivity = 600 articles/40 hour a weak = 15 articles per hour Productivity = Output / Input, Output  the number of articles produced, Input  the number of hours worked ECO-1067

The Difference between Production and Productivity It is important to be perfectly clear on the difference in the meaning of the words production and productivity, Suppose 2 firms are making very similar footwear and have the following weekly outputs: If Firm X is using more than twice as much labour and capital as Firm Y, for example, then its productivity is less than that of Firm Y Firm X shoes Firm Y5.000 shoes ECO-1067

Resource Allocation Problem of resource allocation  Which goods and services should be produced with society’s resources?  Where on the PPF should economy operate?  How should they be produced?  No capital at all  Small amount of capital  More capital  Who should get them?  How do we distribute these products among the different groups and individuals in our society? ECO-1067

The Three Methods of Resources Allocation Traditional Economy  Resources are allocated according to long-lived practices from the past Command Economy (Centrally-Planned)  Resources are allocated according to explicit instructions from a central authority Market Economy  Resources are allocated through individual decision making ECO-1067

The Nature of Markets A market is a group of buyers and sellers with the potential to trade with each other  Global markets  Buyers and sellers spread across the globe  Local markets  Buyers and sellers within a narrowly defined area ECO-1067

The Importance of Prices A price is the amount of money that must be paid to a seller to obtain a good or service When people pay for resources allocated by the market  They must consider opportunity cost to society of their individual actions Markets can create a sensible allocation of resources ECO-1067

Resource Ownership Communism  Most resources are owned in common Socialism  Most resources are owned by state Capitalism  Most resources are owned privately ECO-1067

Types of Economic Systems An economic system is composed of two features  Mechanism for allocating resources  Market  Command  Mode of resource ownership  Private  State ECO-1067

Figure 4: Types of Economic Systems Resource Allocation MarketCommand Private State Resource Ownership Market Capitalism Centrally Planned Capitalism Centrally Planned Socialism Market Socialism ECO-1067