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Transcript of Microeconomics-Introduction
The study of how society manages its scarce resources:
Ten Basic Principles
People face Trade-offs
The Cost of Something Is What You Give Up to Get It
Rational people Think at the Margin
People Respond to Incentives
Trade Can Make Everyone Better Off
Good way to Organize Economic Activity
Sometimes Improve Market Outcomes
Standard of Living Depends on
Its Ability to Produce Goods and Services
Society Faces a Short-Run Trade-off between Inflation and Unemployment
How firms decide how much to produce, how many workers to hire;
How society decides how to divide its resources between national
defense, consumer goods, protecting the environment, and other needs.
Production Possibilities Frontier
P P F
1.Resources are used to maximize capacity
3.Technology remains completely constant
2.Resources are scarce
Example 1: Producing one car requires 2 hours labor.
Producing one computer requires 1 hour labor.
We have total 8 hours labor.
is the study of how households and firms make decisions and how they interact in markets.
is the study of economy-wide phenomena, including inflation, unemployment, and economic growth.
Example 2: Both of U.S. and Japan produce corns and potatoes.
2. Absolute Advantage
The ability to produce a good using fewer inputs than another producer.
U.S has an absolute advantage both in producing corns and potatoes because that the two goods can be produced at a lower cost.
3. Comparative Advantage
The ability to produce a good at a lower opportunity cost than another producer
4/4=1 unit of potato
4/4=1 unit of corn
1/2=0.5 unit of potatoes
2/1=2 unit of corns
U.S has a comparative advantage in producing of potatoes (lower opportunity costs, 1<2), whereas Japan has a comparative advantage in producing of corns (0.5<1)
4. Trade ?
Assume that they produce goods in 8 hours a day, 4 hours for each of goods
Assume that Japan produces corns only, U.S. produces corns for 2.5 hours and potatoes for 5.5 hours
U.S would export potatoes to Japan and import corns. The two goods would be exchanged as follows: 1 units of corns would have a price between 0.5 and 1 unit of potatoes; the potatoes would therefore be priced between 1 and 2 units of corns.
Needs and wants are unlimited, but resources are