Professional Documents
Culture Documents
Introduction to Economics
resources.
that individuals face trade-offs.
the meaning of opportunity cost.
how to use marginal reasoning when making decisions.
how incentives affect peoples behavior.
why trade among people or nations can be good for
everyone.
why markets are a good, but not perfect, way to
allocate resources.
what determines some trends in the overall economy.
world.
two simple modelsthe circular flow and the
production possibilities frontier.
the difference between microeconomics and
macroeconomics.
the difference between positive and normative
statements.
the role of economists in making policy.
why economists sometimes disagree with one another.
3
Economy. . .
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Economic Models
Economists use models to simplify reality in
order to improve our understanding of the
world.
Two of the most basic economic models are:
The Circular Flow Diagram
The Production Possibilities Frontier
2011
Cengage
South-Western
2007
Thomson
South-Western
Wages, rent,
and profit
Goods and
services
bought
HOUSEHOLDS
Buy and consume
goods and services
Own and sell factors
of production
FIRMS
Produce and sell
goods and services
Hire and use factors
of production
Factors of
production
Spending
MARKETS
FOR
FACTORS OF PRODUCTION
Households sell
Firms buy
Labor, land,
and capital
Income
= Flow of inputs
and outputs
= Flow of dollars
Households
Buy and consume goods and services
Own and sell factors of production
3,000
C
A
2,200
2,000
B
Production
possibilities
frontier
1,000
300
600 700
1,000
Quantity of
Cars Produced
2007 Thomson South-Western
Efficiency
Trade-offs
Opportunity cost
Economic growth
3,000
2,300
2,200
G
A
600 650
of
1,000 CarsQuantity
Produced
2007 Thomson South-Western
2011
Cengage
2007
ThomsonSouth-Western
South-Western
Minutes Needed to
Make 1 Kilogram of:
Amount Produced in
8 Hours
Chicken
Potatoes
Chicken
Potatoes
Farmer
60
min/kg
15
min/kg
8 kg
32 kg
Breeder
20
min/kg
10
min/kg
24 kg
48 kg
Breeder
Production Possibilities
Suppose the farmer and breeder decide not to
engage in trade:
Each consumes only what he or she can produce
alone.
The production possibilities frontier is also the
consumption possibilities frontier.
Without trade, economic gains are diminished.
If there is no trade,
the farmer chooses
this production and
consumption.
16
32
Potatoes (kg)
Chicken (kg)
24
If there is no trade,
the breeder chooses
this production and
consumption.
12
24
48
Potatoes (kg)
Farmer
Without Trade:
Production &
Consumption
Breeder
Chicken
Potatoes
Chicken
Potatoes
4 kg
16 kg
12 kg
24 kg
Farmer's
consumption
with trade
A*
5
4
Farmer's
production and
consumption
without trade
Farmer's
production
with trade
32
16
Potatoes (kg)
17
24
Breeder's
consumption
with trade
18
13
B*
B
12
12
24 27
Breeder's
production and
consumption
without trade
48
Potatoes (kg)
Farmer
Breeder
Chicken
Potatoes
Chicken
Potatoes
With Trade:
Production
0 kg
32 kg
18 kg
12 kg
Trade
Gets 5 kg
Gives 15
kg
Gives 5 kg
Gets 15 kg
5 kg
17 kg
13 kg
27 kg
+1 kg
+1 kg
+1 kg
+3 kg
Consumption
GAINS FROM TRADE:
Increase in Consumption
COMPARATIVE ADVANTAGE
Differences in the costs of production
determine the following:
Who should produce what?
How much should be traded for each product?
COMPARATIVE ADVANTAGE
Two ways to measure differences in costs of
production:
The number of hours required to produce a unit of
output (for example, one pound of potatoes).
The opportunity cost of sacrificing one good for
another.
Absolute Advantage
The comparison among producers of a good
according to their productivity.
Describes the productivity of one person, firm, or
nation compared to that of another.
The producer that requires a smaller quantity of
inputs to produce a good is said to have an absolute
advantage in producing that good.
Absolute Advantage
The Breeder needs only 10 minutes to produce
a kilogram of potatoes, whereas the Farmer
needs 15 minutes.
The Breeder needs only 20 minutes to produce
a kilogram of chicken, whereas the Farmer
needs 60 minutes.
The Rancher has an absolute advantage in
the production of both meat and potatoes.
2007 Thomson South-Western
Chicken costs
The Breeders opportunity cost of a kilogram of
chicken is only 2 kilogram of potatoes.
The Farmers opportunity cost of a kilogram of
chicken is only 4 kilogram of potatoes...
2007 Thomson South-Western
Benefits of Trade
Trade can benefit everyone in a society because it
allows people to specialize in activities in which
they have a comparative advantage.
APPLICATIONS OF COMPARATIVE
ADVANTAGE
Should Malaysia trade
with other countries?
Each country has many citizens with different
interests. International trade can make some
individuals worse off, even as it makes the country
as a whole better off.
Importsgoods produced abroad and sold domestically
Exportsgoods produced domestically and sold abroad