DR. PETROS KOSMASLECTURER

VARNA FREE UNIVERSITY

ACADEMIC YEAR 2010 - 2011

LECTURE 4

MICROECONOMICS AND MACROECONOMICS

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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.

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ECONOMIC RESOURCES (Factors of Production)

Land

Labor

Capital

EntrepreneurshipECO-1067

Land

Natural resources

Everything contained in the earth or found in the sea

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Labour

Human resources

All people who work in the economy

Full- and part-time workers

Managers

Public employees

Professional people

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Capital

Money needed to start and operate a business

Goods used in the production of other goods

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Entrepreneurship

Skills of people willing to take the risk of starting their own business

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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

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All production carries an opportunity cost

To produce more of one thing

Must shift resources away from producing something else

Opportunity Cost and Society

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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

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Figure 1: The Production Possibilities Frontier

Quantity of chocolate per

Period

Quantity of corn per

Period

100,000 200,000 300,000 400,000 500,000

1,000,000950,000850,000

700,000

500,000400,000

BA

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.

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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

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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 . . .

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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

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Figure 3: The Effect of a New Technology to Produce Chocolate

Quantity of chocolate per Period

Quantity of corn per

period

300,000 500,000 600,000

1,000,000

700,000

A

J

D

H

F

More corn AND More chocolate

Same corn+ More chocolate

F'

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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 hourWorker 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

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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

10.000 shoes

Firm Y

5.000 shoes

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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?

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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

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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

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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

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Resource Ownership

Communism Most resources are owned in common

Socialism Most resources are owned by state

Capitalism Most resources are owned privately

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Types of Economic Systems

An economic system is composed of two features

Mechanism for allocating resources Market Command

Mode of resource ownership Private State

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Figure 4: Types of Economic Systems

Resource Allocation

Market Command

Private

State

Resource Ownership

Market CapitalismCentrally Planned

Capitalism

Centrally Planned Socialism

Market Socialism

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