Principles of Economics Chapters 1 & 2 PowerPoint, Lecture notes of Economics

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Principles of Economics

1.1: What is Economics, and Why Is It Important?

1.2: Microeconomics and Macroeconomics

1.3: How Economists Use Theories and Models

to Understand Economic Issues

1.4: How To Organize Economies: An Overview

of Economic Systems

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Scarcity

Homeless people are a stark reminder that scarcity of resources is real. (Credit: “daveynin”/Flickr Creative Commons) Discussion Question: What are examples of critical goods and services? This OpenStax ancillary resource is © Rice University under a CC-BY 4.0 International license; it may be reproduced or modified but must be attributed to OpenStax, Rice University and any changes must be noted. Any images attributed to other sources are similarly available for reproduction, but must be attributed to their sources.

Economics

Economics is the study of best allocation of scarce resources among alternative uses to maximize production, consumption and standards of livings. It is about not wasting the resources because they are scarce, using all resources to produce maximum goods and services that people need the most. To have more goods and services, to have a better quality of life. To raise our standards of our life. Economics is about production. The objective is to maximize production with the recourses that a country has.

● (^) Division of labor - the way in which different workers divide required tasks to produce a good or service. ○ (^) Workers on an assembly line are an example of the divisions of labor. (Credit: Nina Hale/Flickr Creative Commons)

The Division of and Specialization of Labor

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Why the Division of Labor Increases Production

● (^) Dividing and subdividing the tasks involved with producing a good or service, produces a greater quantity of output. ● (^) Specialization - when workers or firms focus on particular tasks for which they are well-suited within the overall production process.

• (^) Specialization allows businesses to take advantage of economies of scale , which means that for many goods,as the level of production increases, the average cost of producing each individual unit declines. This OpenStax ancillary resource is © Rice University under a CC-BY 4.0 International license; it may be reproduced or modified but must be attributed to OpenStax, Rice University and any changes must be noted. Any images attributed to other sources are similarly available for reproduction, but must be attributed to their sources.

Economic Theories and Models

● (^) A theory is a simplified representation of how two or more variables interact with each other.

• (^) A good theory is simple enough to understand, while complex enough to capture the key features of the object or situation you are studying. ● (^) Economists use models to test theories, but for this course we will use the terms model and theory interchangeably. This OpenStax ancillary resource is © Rice University under a CC-BY 4.0 International license; it may be reproduced or modified but must be attributed to OpenStax, Rice University and any changes must be noted. Any images attributed to other sources are similarly available for reproduction, but must be attributed to their sources.

Choices and Tradeoffs

In general, the higher the degree, the higher the salary. So why aren’t more people pursuing higher degrees? The short answer: choices and tradeoffs. (Credit: modification of work by “Jim, the Photographer”/Flickr Creative Commons) This OpenStax ancillary resource is © Rice University under a CC-BY 4.0 International license; it may be reproduced or modified but must be attributed to OpenStax, Rice University and any changes must be noted. Any images attributed to other sources are similarly available for reproduction, but must be attributed to their sources.

Why Opportunity cost is Important in Because Economics in a country with given limited resources, we have to make decisions and choices what to produce with those resources. For example if we decide to use our labors to produce more agricultural goods, then we will produce less industrial goods. Opportunity cost of more agricultural good it the industrial goods that we give up.

The Concept of Opportunity Cost

● (^) Opportunity cost indicates what one must give up to obtain what he or she desires.

• (^) The cost of one item is the lost opportunity to do or consume something else.
• (^) The opportunity cost is the value of the next best alternative.
• (^) A fundamental principle of economics is that every choice has an opportunity cost. ● (^) For Alphonso, the opportunity cost of a burger is the four bus tickets he would have to give up. This OpenStax ancillary resource is © Rice University under a CC- BY 4.0 International license; it may be reproduced or modified but must be attributed to OpenStax, Rice University and any changes must be noted. Any images attributed to other sources are similarly available for reproduction, but must be attributed to their sources.

Opportunity Cost Examples

Discussion Question: What are the opportunity costs of... ● (^) Buying vs. leasing a car ● (^) Investing in different ways (i.e. savings accounts, certificates of deposit, mutual funds, stocks, etc.) ● (^) Going out to eat vs. preparing food at home ● (^) Walking or taking public transportation This OpenStax ancillary resource is © Rice University under a CC-BY 4.0 International license; it may be reproduced or modified but must be attributed to OpenStax, Rice University and any changes must be noted. Any images attributed to other sources are similarly available for reproduction, but must be attributed to their sources.

Principles of economics

• (^) People make rational choices with limited resources
• (^) Opportunity cost/tradeoff
• (^) Incentives
• (^) Benefits
• (^) Marginal Analysis
• (^) Specialization leads to gain

The Budget Constraint: Alphonso’s Consumption

Choice

● (^) Each point on the budget constraint represents a combination of burgers and bus tickets whose total cost adds up to Alphonso’s budget of $10. ● (^) The slope of the budget constraint is determined by the relative price of burgers and bus tickets. ● (^) Giving up one burger means gaining four bus tickets. ● (^) The opportunity set - every point on (or inside) the constraint which shows a combination of burgers and bus tickets that Alphonso can afford. ● (^) Any point outside the constraint is not affordable, because it would cost more money than Alphonso has in his budget. This OpenStax ancillary resource is © Rice University under a CC-BY 4.0 International license; it may be reproduced or modified but must be attributed to OpenStax, Rice University and any changes must be noted. Any images attributed to other sources are similarly available for reproduction, but must be attributed to their sources.

Switzerland& Haiti

Population: Switzerland 8.372 million (2016) Haiti 10.85 million (2016) Total Area: Switzerland 41,285 km (landlock)

Machines,

Haiti 27, square kilometres Roads Total Production: Switzerland $659. billion Haiti $8.023 billion