Principles of Microeconomics Eleventh Edition, Chapter 1 PDF

Principles of Microeconomics SAYRE // MORRIS // GHAYAD Eleventh Edition CHAPTER 1 The Economic Problem Prepared by Ifeanyi Uzoka, Sheridan College © 2024 McGraw Hill ...

Principles of Microeconomics SAYRE // MORRIS // GHAYAD Eleventh Edition CHAPTER 1 The Economic Problem Prepared by Ifeanyi Uzoka, Sheridan College © 2024 McGraw Hill  CHAPTER 1 The Economic Problem Learning Objectives: 1. Describe why economics is a very relevant discipline by demonstrating that many of the controversies in our society have a distinct economic flavour. 2. Define economics and make a distinction between macroeconomics and microeconomics. 3. Demonstrate that scarce resources, choice, and opportunity cost are at the heart of economics, and that efficiency—both productive and allocative— plays a major role © 2024 McGraw Hill 1-2  CHAPTER 1 The Economic Problem Learning Objectives: 4. Explain why trade results in more productive economies 5. Explain the three fundamental questions that all societies must address 6. Explain the four different ways that economic societies can be organized © 2024 McGraw Hill 1-3  CHAPTER 1 The Economic Problem Learning Objectives: 7. Use the production possibilities model to illustrate choice, opportunity cost, efficiency, and unemployment © 2024 McGraw Hill 1-4  LO1: The Relevance of Economics © 2024 McGraw Hill 1-5  The Relevance of Economics Current Controversies: 1. Economic growth 2. Income redistribution 3. Road-usage pricing in congested cities 4. Globalization © 2024 McGraw Hill 1-6  LO2:What is Economics? © 2024 McGraw Hill 1-7  What is Economics? Economics is a social science that studies the ways humans and societies organize themselves to make choices about the use of scarce resources, which are used to produce the goods and services necessary to satisfy human wants and needs. © 2024 McGraw Hill 1-8  What is Economics? Economics uses the scientific method in order to construct theories which explain the world around us © 2024 McGraw Hill 1-9  What is Economics? Positive Statement – Facts that can be verified with empirical data Normative Statement – Based on a person’s beliefs or value system – Cannot be verified with data © 2024 McGraw Hill 1-10  Test Your Understanding Identify each of the following statements as either positive (P) or normative (N) a.The federal government’s budget this year is the largest in history. b.The national debt is at a manageable level and therefore is nothing to worry about. c.The price of gasoline is higher than it needs to be. d.Rising Canadian exports are creating many new jobs in the country. © 2024 McGraw Hill 1-11  Test Your Understanding Identify each of the following statements as either positive (P) or normative (N) a.The federal government’s budget this year is the largest in history. POSITIVE b.The national debt is at a manageable level and therefore is nothing to worry about. NORMATIVE © 2024 McGraw Hill 1-12  Test Your Understanding Identify each of the following statements as either positive (P) or normative (N) c. The price of gasoline is higher than it needs to be. NORMATIVE d. Rising Canadian exports are creating many new jobs in the country. POSITIVE © 2024 McGraw Hill 1-13  What is Economics? Economic Theory – Looks at how positive statements are related – Uses the scientific method: Set up a hypothesis Define terms, state assumptions Gather data to test hypothesis Accept, reject, or modify © 2024 McGraw Hill theory 1-14  What is Economics? Macroeconomics – How the major components of an economy interact – Unemployment, inflation, government economic policies, interest rates Microeconomics – Outcomes of decisions by people and firms – Supply and demand, costs of production, market structures © 2024 McGraw Hill 1-15  Macro vs. Micro MACRO MICRO Of particular Prices Average of all products products Of a particular firm Production Of the whole economy or industry Of a profession or Incomes Total national income factor income Employmen Overall national By firm, industry or t employment occupation For the government On an individual or Taxes revenue firm © 2024 McGraw Hill 1-16 Test Your Understanding Identify which of the following topics would likely appear in a Microeconomics course and which in Macroeconomics course. A The price of iPods B Unemployment rates C The presence of monopolies D The rate of economic © 2024 McGraw Hill 1-17 Test Your Understanding Identify which of the following topics would likely appear in a Microeconomics course and which in Macroeconomics course. A The price of iPods MICRO B Unemployment rates C The presence of monopolies D The rate of economic © 2024 McGraw Hill 1-18 Test Your Understanding Identify which of the following topics would likely appear in a Microeconomics course and which in Macroeconomics course. A The price of iPods MICRO B Unemployment rates MACRO C The presence of MICRO monopolies D The rate of economic © 2024 McGraw Hill MACRO 1-19  LO3:Efficiency and Allocation © 2024 McGraw Hill 1-20  Economic Resources Resources are Scarce: – Resources (or “factors of production”, or “inputs”) are anything used to produce goods and services – Scarcity means we do not have enough resources to produce everything everybody wants © 2024 McGraw Hill 1-21  Economic Resources Labour: Human mental and physical effort Land: Any natural resource used to produce goods or services Capital: Tools, equipment, factories, and buildings used in production process Enterprise: The human resource that innovates and takes risks © 2024 McGraw Hill 1-22 Economic Resources and Payments © 2024 McGraw Hill 1-23 Test Your Understanding Indicate whether the resource in question is: labour (L), capital (K), land (N), or A A bar-code scanner in a supermarket enterprise (E): B Fresh drinking water C Copper deposits in a mine D The work of a systems analyst E The first application of e- technology to an economics textbook F An office building © 2024 McGraw Hill 1-24 Test Your Understanding Indicate whether the resource in question is: labour (L), capital A A bar-code scanner in (K), land (N), or a supermarket K enterprise (E): B Fresh drinking water C Copper deposits in a mine D The work of a systems analyst E The first application of e- technology to an economics textbook F An office building © 2024 McGraw Hill 1-25 Test Your Understanding Indicate whether the resource in question is: labour (L), capital (K), land (N), or enterprise (E): A A bar-code scanner in a supermarket K B Fresh drinking water N C Copper deposits in a mine N D The work of a systems analyst L E The first application of e- technology E to an economics textbook F An office building K © 2024 McGraw Hill 1-26  Technology and Opportunity Cost Technology – Method of production; the way in which resources are combined to produce goods and services Opportunity Cost – The value of the next-best alternative that is given up as a result of making a particular choice © 2024 McGraw Hill 1-27  Technology and Opportunity Cost Scarcity forces choice (for society, government, and the individual), and choice involves an opportunity cost which is the sacrificed benefit of the next best alternative. © 2024 McGraw Hill 1-28  Consumer and Capital Goods Consumer goods and services – Products used by consumers to satisfy wants and needs Capital goods – Factories, tools and equipment used to make other goods for sale – Making more capital goods increases growth, but there is an opportunity cost in terms of consumer goods© 2024 foregone McGraw Hill 1-29  Consumer and Capital Goods Consumer goods and services – Only consumers buy consumer goods – Example – pizza Capital goods – Only firms or governments buy capital goods – Example - machinery © 2024 McGraw Hill 1-30  Test Your Understanding Decide whether each of the following is a: consumer good (C), capital good (K), or both (B): A A jackhammer B A carton of cigarettes C An office building D A tooth-brush E A hammer F A farm tractor © 2024 McGraw Hill 1-31  Test Your Understanding Decide whether each of the following is a: consumer good (C), capital good (K), or both (B): A A jackhammer K B A carton of cigarettes C An office building D A tooth-brush E A hammer F A farm tractor © 2024 McGraw Hill 1-32  Test Your Understanding Decide whether each of the following is a: consumer good (C), capital good (K), or both (B): A A jackhammer K B A carton of cigarettes C C An office building K D A tooth-brush C E A hammer B F A farm tractor K © 2024 McGraw Hill 1-33 Importance of Efficiency © 2024 McGraw Hill 1-34  Efficiency Productive Efficiency – Production of an output at the lowest possible average cost Allocative Efficiency – Production of that combination of outputs that best satisfies consumers’ demands © 2024 McGraw Hill 1-35  Five Allocative Methods There are five different allocative methods: – first come, first served; – lottery; – sellers’ preference; – government decree; and – the market. © 2024 McGraw Hill 1-36  LO4: The Power of Trade © 2024 McGraw Hill 1-37  Trade Voluntary trade benefits both parties The more trade, the greater the benefits Applies to individuals as well as to © 2024 McGraw Hill 1-38  Benefits of Trade Maximum Potential Output: Salmon Nets Haida 20 OR 10 Bear River 10 OR 20 With NO trade, the cities produce half of each item: Salmon Nets Haida 10 AND 5 Bear River 5 AND 10 Total Output 15 AND 15 © 2024 McGraw Hill 1-39  Benefits of Trade Maximum Potential Output: Salmon Nets Haida 20 OR 10 Bear River 10 OR 20 WITH trade, each country produces what it is best at: Salmon Nets Haida 20 AND 0 Bear River 0 AND 20 Total Output 20 AND 20 © 2024 McGraw Hill 1-40  Benefits of Trade Through specialization and trade, the two countries can make a gain of 5 salmon and 5 nets © 2024 McGraw Hill 1-41  LO5: Three Fundamental Questions © 2024 McGraw Hill 1-42  Three Fundamental Questions All economic societies must answer these questions: 1. What to produce (luxuries vs necessities; capital vs consumer goods) 2. How to produce (technology) 3. For whom (how should the goods – or © 2024 McGraw Hill 1-43 income- be distributed. Who gets what.) LO6: Four Types of Economies: The Four Cs © 2024 McGraw Hill 1-44  Four Types of Economies 1. Co-operative Economies (foraging societies) 2. Command Economies (totalitarian states) 3. Customary Economies (traditional, religious societies) 4. Competitive Economies (market economies) Modern countries are usually a combination of all ©of 2024 McGraw Hill 1-45  LO7: Production Possibilities © 2024 McGraw Hill 1-46  Production Possibilities Model Production Possibilities Curve: – A graphical representation of the various combinations of maximum output that can be produced from the available resources and technology – Assumptions: Full employment Use of the best technology available © 2024 McGraw Hill 1-47  Production Possibilities Model Table 1.1 Production of Cars and Tonnes of Wheat (Millions of Units) CARS WHEAT % of % of Possible Output Resources Output Resources Output Combination Used Used A 0 0 100 100 B 20 50 80 95 C 40 90 60 85 D 60 120 40 65 E 80 140 20 40 F 100 150 0 0 © 2024 McGraw Hill 1-48 Production Possibilities Model Table 1.2 Production Possibilities for Cars and Wheat (output in millions of units) A B C D E F Cars 0 50 90 120 140 150 Wheat 100 95 85 65 40 0 © 2024 McGraw Hill 1-49 Table Production Possibilities for Cars and Wheat 1.2 A B C D E F Cars 0 50 90 120 140 150 Wheat 100 95 85 65 40 0 Wheat a Unattainable Points on the 100 b 95 x curve 85 c represent maximum Attainable output possible d 65 with available resources e 40 f 50 90 120 14 15 Cars © 2024 McGraw Hill 0 0 1-50  Production Possibilities Model Scarcity – Represented by points outside the curve Choice – Represented by points on the curve (efficient) and points within the curve (inefficient) Opportunity Cost – Represented by the downward slope of the curve © 2024 McGraw Hill 1-51 The Law of Increasing Costs The Law of increasing costs: as an economy’s total production level of any particular item increases, the per unit cost of producing additional units of that item will rise. © 2024 McGraw Hill 1-52 The Law of Increasing Costs Implications of the law of increasing costs: – Factors of production are not equally suitable for the production of different products. – As output increases, the per unit costs of additional units increases. – Gives the production possibilities curve © 2024 McGraw Hill 1-53  Law of Increasing Opportunity Costs As more cars are Wheat a produced, an 100 increasing 95 +4 b 0 - amount of wheat 85 10 +3 must be given up c 0 -20 +2 65 d 0 -25 40 e f 50 90 120 14 15 Cars © 2024 McGraw Hill 0 0 1-54  Test Your Understanding a) If society produces 1000 units of butter, Quantity of guns per period how many guns can it b 400 produce? c 300 b) If society is at “b” on the PPC, d what is 150 the cost of 1000 more 1000 2000 3000 units of © 2024 McGraw Hill Quantity of butter per period 1-55 butter?  Test Your Understanding a a) If society produces 1000 units of butter, b how many guns 400 Quantity of guns per period c can it produce? 300 400 units of guns d b) If society is at 150 “b” on the PPC, what is the cost of 1000 more 1000 2000 3000 units of butter? © 2024 McGraw Hill Quantity of butter per period 1-56  Test Your Understanding c) c) Is opportunity Quantity of guns per period cost greater for move from “c” to b 400 “d” compared to a c move from “b” to 300 “c”? b to c – 100 d 150 guns per 1000 units of butter c to d – 150 guns per 1000 1000 2000 3000 Quantity of butter per period units of butter, © 2024 McGraw Hill 1-57  PPC and Economic Growth 120 Growth means 100 the economy is Quantity of wheat per period able to produce 80 more of everything. 60 Illustrated by SHIFT of PPC 40 PP1 PP2 20 0 0 30 60 90 120 150 180 Quantity of cars per period © 2024 McGraw Hill 1-58  PPC and Technological Change 120 Improvement in technology in car Quantity of wheat per period 100 production shifts Quantity of wheta per period the curve to PP2. 80 d Economy can now produce more of c 60 either good, or b more of both. a Illustrated by a 40 PIVOT of the PPC 20 PP1 PP2 0 0 30 60 90 120 150 180 Quantity Quantity of cars of cars perper period period © 2024 McGraw Hill 1-59  Test Your Understanding Quantity per Year A B C D Grain 0 25 40 50 Tools 12 8 4 0 a) Draw a PPC1 with tools on the horizontal axis. Now, assume new technology that can be used only in the tool industry is developed, which increases tool output by 50%. b) Draw a new PPC2 that reflects this new technology. c) If Finhorn produced 12 units of tools per year, how many units of grain could be produced after the introduction of the new technology? © 2024 McGraw Hill 1-60  TYU Solution New New Grain technology technology d allows a 50% allows 25 50 units of increase in tool grain to be 40 c c2 production produced with 12 units of b tools 25 b 2 PPC2 PPC1 a d2 4 8 12 16 18 Tools © 2024 McGraw Hill 1-61  CHAPTER 1 SUMMARY Key Concepts to Remember 1. Economics is a relevant discipline in our society 2. Scientific method is used in economics, which is divided into microeconomics and macroeconomics 3. Scarcity, choice and opportunity cost are at the heart of economics 4. Greater trade results in economies being more productive © 2024 McGraw Hill 1-62  CHAPTER 1 SUMMARY Key Concepts to Remember 5. What to produce, how to produce it, and for whom are fundamental economic questions 6. Economic societies may be organized through co-operation, command, custom and competition 7. The production possibilities model illustrates choice, opportunity cost, efficiency, and unemployment © 2024 McGraw Hill 1-63