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ECONOMICS
Economics is the study of how people choose to use their resources in attempts to satisfy their unlimited wants As individuals we have limited time and spending power As individuals and societies we are faced with limited resources and virtually unlimited wants Economists study the choices we make and also the consequences of these choices
MICROECONOMICS vs MACROECONOMICS
MICROECONOMICS
The study of the choices made by households, firms and government and how these choices affect the markets for goods and services
MACROECONOMICS
The study of the nations economy as a whole. Eg: economic growth, inflation, unemployment
Economic Resources
people or things that possess the ability to help produce commodities (goods & services) that people value.
land
rent
Resource Suppliers
Producers of Goods
interest entrepreneur
profit
SCARCITY
Scarcity is a situation in which resources are limited in quantity and can be used in different ways. Peoples wants are greater than the economys ability to produce desirable goods & services Because our resources are limited, we must sacrifice one thing for another.
Scarcity CHOICES
Opportunity Cost
THE OPPORTUNITY COST of an action is the next best foregone alternative.
Assumptions
To draw PPC, we need 4 assumption: Producing 2 goods Fixed resources Fixed technology Producing at full employment
FIGURE 1-1: Production Possibility At point A, society can Frontier produce 10 units of good
Good Y
11
10
Y & 3 units of good X At B, can produce 4 unit of good Y and 12 unit of good X.
D C
12
13
Good X
PPC - Example
Production Possibilities
Food Clothing
0 1 2 3 4 5 15 14 12 9 5 0
f 1 2 3 4 5 food 5 e 9 d clothing 15 14 12 a b c Figure 1
3 4
Good X
2
Good X 0 1213
FIGURE 1-4: Production Possibility opp cost of good X rises so Frontier that it is much higher at
Good Y
10 9
Opportunity costs of economic action not constant, but vary along PPF
2
Good X 0 3 4 1213
Production of Clothing
45 40 35 30 25 20 15 10 5 0 0 5 10 15 20 25 30
35
40
45
50
Production of Food
Combination of goods
A
B C D E
0
4 7 9 10
10
9 7 4 0
1 TV 2 TV 3 TV 4 TV
Combination of goods A B C D
E
F g
8
10 12
4
2 0
2 TV
2 TV 2 TV
2/2 = 1 TV
2/2 = 1 TV 2/2 = 1 TV
Economic Growth
Good Y
Why would the PPF shift outward? -- more resources: land, labor, capital, and human capital -- technological progress
Initial PPF
Good X
Improvement that benefits both products. PPC shifts outward (to the right), from PPC1 to PPC2.
PPC1 PPC
2
Production of Food
PPC1
PPC
2
Production of Food
Production of Food
Alternative PPFs
Good Y
Good X