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DR. PETROS KOSMASLECTURER
VARNA FREE UNIVERSITY
ACADEMIC YEAR 2010 - 2011
LECTURE 4
MICROECONOMICS AND MACROECONOMICS
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Scarcity
A condition that exists when there are not enough goods or services available to meet the wants and needs of consumers
A study of how to meet the unlimited wants of a society with its limited resources.
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ECONOMIC RESOURCES (Factors of Production)
Land
Labor
Capital
EntrepreneurshipECO-1067
Land
Natural resources
Everything contained in the earth or found in the sea
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Labour
Human resources
All people who work in the economy
Full- and part-time workers
Managers
Public employees
Professional people
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Capital
Money needed to start and operate a business
Goods used in the production of other goods
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Entrepreneurship
Skills of people willing to take the risk of starting their own business
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The Concept of Opportunity Cost
Opportunity cost of any choice What we forego when we make that choice
Most accurate and complete concept of cost
Opportunity cost of a choice includes both explicit costs and implicit costs Explicit cost— money actually paid out for a choice Implicit cost—value of something sacrificed when no
direct payment is made
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All production carries an opportunity cost
To produce more of one thing
Must shift resources away from producing something else
Opportunity Cost and Society
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Production Possibilities Frontiers
(PPF)
Curve showing all combinations of two goods that can be produced with resources and technology available
Society’s choices are limited to points on or inside the PPF
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Figure 1: The Production Possibilities Frontier
Quantity of chocolate per
Period
Quantity of corn per
Period
100,000 200,000 300,000 400,000 500,000
1,000,000950,000850,000
700,000
500,000400,000
BA
C
D
E
F
W
At point A, all resources are used for corn
Moving from point A to point B requires shifting resources out of corn and into chocolate.
At point F. all resources are used for chocolate.
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Increasing Opportunity Cost
According to law of increasing opportunity cost
The more of something we produce
The greater the opportunity cost of producing even more of it
This principle applies to all of society’s production choices
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Figure 2: Production and Unemployment
A
B
Civilian Goods per Period
Military Goods per Period
2. then moved to the PPF during the war. Both military and civilian production increased.
1. Before WWII the United States operated inside its PPF . . .
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Economic Growth
If economy is already operating on its PPF Cannot exploit opportunity to have more of everything by
moving to it
But what if the PPF itself were to change? Couldn’t we then produce more of everything? This happens when an economy’s productive capacity
grows
Many factors contribute to economic growth, but they can be divided into two categories Quantities of available resources Technological change enables us to produce more from a
given quantity of resources
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Figure 3: The Effect of a New Technology to Produce Chocolate
Quantity of chocolate per Period
Quantity of corn per
period
300,000 500,000 600,000
1,000,000
700,000
A
J
D
H
F
More corn AND More chocolate
Same corn+ More chocolate
F'
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Productivity
Productivity is a measure of the efficiency with which goods and services are produced.
Suppose 2 workers, A and B, are making identical articles, both of them using exactly the same equipment
In a 40 hour week, Worker A produces 400 articles In a 40 hour week, Worker B produces 600 articles
Worker A’s productivity = 400 articles/40 hour a weak = 10 articles per hourWorker B’s productivity = 600 articles/40 hour a weak = 15 articles per hour
Productivity = Output / Input,
Output the number of articles produced, Input the number of hours worked
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The Difference between Production and Productivity
It is important to be perfectly clear on the difference in the meaning of the words production and productivity,
Suppose 2 firms are making very similar footwear and have the following weekly outputs:
If Firm X is using more than twice as much labour and capital as Firm Y, for example, then its productivity is less than that of Firm Y
Firm X
10.000 shoes
Firm Y
5.000 shoes
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Resource Allocation
Problem of resource allocation Which goods and services should be produced
with society’s resources? Where on the PPF should economy operate?
How should they be produced? No capital at all Small amount of capital More capital
Who should get them? How do we distribute these products among the different
groups and individuals in our society?
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The Three Methods of Resources Allocation
Traditional Economy Resources are allocated according to long-lived
practices from the past
Command Economy (Centrally-Planned) Resources are allocated according to explicit
instructions from a central authority
Market Economy Resources are allocated through individual decision
making
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The Nature of Markets
A market is a group of buyers and sellers with the potential to trade with each other
Global markets Buyers and sellers spread across the globe
Local markets Buyers and sellers within a narrowly defined
area
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The Importance of Prices
A price is the amount of money that must be paid to a seller to obtain a good or service
When people pay for resources allocated by the market They must consider opportunity cost to society of their
individual actions
Markets can create a sensible allocation of resources
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Resource Ownership
Communism Most resources are owned in common
Socialism Most resources are owned by state
Capitalism Most resources are owned privately
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Types of Economic Systems
An economic system is composed of two features
Mechanism for allocating resources Market Command
Mode of resource ownership Private State
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Figure 4: Types of Economic Systems
Resource Allocation
Market Command
Private
State
Resource Ownership
Market CapitalismCentrally Planned
Capitalism
Centrally Planned Socialism
Market Socialism
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