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17
Adam Smith--The Invisible Smith--The Hand
Adam Smith (1723-1790) saw prices (1723as force that directed resources into activities where resources were most valuable. Prices told both consumers and firms the “worth” of goods. worth” Smith’ Smith’s somewhat incomplete explanation for prices: determined by the costs to produce the goods.
11
FIGURE 1-1: Production Possibility Frontier 1-
Amount of food per week (lbs.) 10 9.5 A
Opportunity cost of clothing = ½ pound of food
0
3 4
Amount of clothing per week (articles)
4
B
0
3
Amount of clothing 12 per week—articles of clothing
7
Production Possibility Frontier
At B, society can choose to produce 4 lbs. of food and 12 articles of clothing. Without more resources, points outside production possibilities frontier are unattainable
18
Adam Smith--the Invisible Hand Smith--the
In 18th century, labor was primary resource. Thus Smith embraced laborlaborbased theory of prices:
• If catching a deer took twice as long as catching a beaver, one deer should trade for two beaver (the relative price of a deer is two beavers). • Figure 1-2(a), horizontal line at P* shows that 1any number of deer can be produced without affecting relative cost
19
FIGURE 1-2(a): Smith’s Model 1Price (hrs)
P*
Quantity deer per week
20
David Ricardo--Diminishing Ricardo--Diminishing Returns
David Ricardo (1772-1823) believed (1772that labor and other costs would rise with productiobility Frontier
Graph showing all possible combinations of goods produced with fixed resources Figure 1-1 shows production 1possibility frontier--food and clothing frontier--food produced per week
• Resources are scarce; we must choose among what we have to work with.
8
Production Possibility Frontier
Simple model illustrates five principles common to microeconomic situations: Scarce Resources Scarcity expressed as Opportunity costs Rising Opportunity Costs Importance of Incentives Inefficiency costs real resources
© 2006 Thomson Learning/South-Western
Chapter 1
Economic Models
© 2004 Thomson Learning/South-Western
Economics
Economics • How societies allocate scarce resources among alternative uses— uses—three questions: What to produce How much to produce Who gets the physical and monetary proceeds
10
Opportunity Cost Example
Figure 1-1: if economy produces one 1more article of clothing beyond 10 at point A, economy can only produce 9.5 lbs. of food, given scarce resources. Tradeoff (or OPPORTUNITY COST) COST) at pt. A: ½ lb food for each article of clothing.
12
Rising Opportunity Costs
Fig.1Fig.1-1 also shows that opportunity cost of clothing rises so that it is much higher at point B (1 unit of clothing costs 2 lbs. of food). Opportunity costs of economic action not constant, but vary along PPF
16
Basic Supply-Demand Model SupplyModel describes how sellers’ and sellers’ buyers’ buyers’ behavior determines good’s good’ price Economists hold that market behavior generally explained by relationship between buyers’ buyers’ preferences for a good (demand) (demand) and firms’ costs involved in bringing firms’ that good to market (supply). (supply).
3
MICROECONOMICS
How individuals and firms make economic choices among scarce resources
How these choices create markets
4
Economic Models
Simple theoretical descriptions-descriptions-capture essentials of how economies work
• As new, less fertile, land was cultivated, farming would require more labor for same yield
Increasing cost argument: now referred to as the Law of Diminishing Returns
15
B
0
3 4
1213
Uses of Microeconomics
Uses of microeconomic analysis vary. One useful way to categorize: by user type:
• Individuals making decisions regarding jobs, purchases, and finances; • Businesses making decisions regarding product demand or production costs, or • Governments making policy decisions about economic effects of various proposed or existing laws and regulations.
• Real economies too complex to describe in useful detail • Models are unrealistic, but useful
Maps unrealistic--do not show every house, unrealistic--do parking lot, etc. Despite lack of “realism,” realism,” maps show overall picture; help us get where we want to go; form mental image
• At point A, society can produce 10 units of food and 3 units of clothing
6
FIGURE 1-1: Production 1Possibility Frontier
Amount of food per week— lbs. 10 A
14
B
0
1213
FIGURE 1-1: Production Possibility Frontier 1Amount of food per week 10 9.5 A Opportunity cost of clothing = ½ pound of food
Opportunity cost of clothing = 2 pounds of food 4 2 Amount of clothing per week
9
Scarcity And Opportunity Costs
Opportunity cost: Cost of a good as measured by goods or services that could have been produced using those scarce resources
13
FIGURE 1-1: Production Possibility Frontier 1Amount of food per week (lbs.)
Opportunity cost of clothing = 2 pounds of food 4 2 Amount of clothing per week (articles)
Intermediate Microeconomics and Its Application
10th Edition
by
Walter Nicholson, Amherst College Christopher Snyder, Dartmouth College
PowerPoint Slide Presentation by Mark Karscig Central Missouri State University
Adam Smith--The Invisible Smith--The Hand
Adam Smith (1723-1790) saw prices (1723as force that directed resources into activities where resources were most valuable. Prices told both consumers and firms the “worth” of goods. worth” Smith’ Smith’s somewhat incomplete explanation for prices: determined by the costs to produce the goods.
11
FIGURE 1-1: Production Possibility Frontier 1-
Amount of food per week (lbs.) 10 9.5 A
Opportunity cost of clothing = ½ pound of food
0
3 4
Amount of clothing per week (articles)
4
B
0
3
Amount of clothing 12 per week—articles of clothing
7
Production Possibility Frontier
At B, society can choose to produce 4 lbs. of food and 12 articles of clothing. Without more resources, points outside production possibilities frontier are unattainable
18
Adam Smith--the Invisible Hand Smith--the
In 18th century, labor was primary resource. Thus Smith embraced laborlaborbased theory of prices:
• If catching a deer took twice as long as catching a beaver, one deer should trade for two beaver (the relative price of a deer is two beavers). • Figure 1-2(a), horizontal line at P* shows that 1any number of deer can be produced without affecting relative cost
19
FIGURE 1-2(a): Smith’s Model 1Price (hrs)
P*
Quantity deer per week
20
David Ricardo--Diminishing Ricardo--Diminishing Returns
David Ricardo (1772-1823) believed (1772that labor and other costs would rise with productiobility Frontier
Graph showing all possible combinations of goods produced with fixed resources Figure 1-1 shows production 1possibility frontier--food and clothing frontier--food produced per week
• Resources are scarce; we must choose among what we have to work with.
8
Production Possibility Frontier
Simple model illustrates five principles common to microeconomic situations: Scarce Resources Scarcity expressed as Opportunity costs Rising Opportunity Costs Importance of Incentives Inefficiency costs real resources
© 2006 Thomson Learning/South-Western
Chapter 1
Economic Models
© 2004 Thomson Learning/South-Western
Economics
Economics • How societies allocate scarce resources among alternative uses— uses—three questions: What to produce How much to produce Who gets the physical and monetary proceeds
10
Opportunity Cost Example
Figure 1-1: if economy produces one 1more article of clothing beyond 10 at point A, economy can only produce 9.5 lbs. of food, given scarce resources. Tradeoff (or OPPORTUNITY COST) COST) at pt. A: ½ lb food for each article of clothing.
12
Rising Opportunity Costs
Fig.1Fig.1-1 also shows that opportunity cost of clothing rises so that it is much higher at point B (1 unit of clothing costs 2 lbs. of food). Opportunity costs of economic action not constant, but vary along PPF
16
Basic Supply-Demand Model SupplyModel describes how sellers’ and sellers’ buyers’ buyers’ behavior determines good’s good’ price Economists hold that market behavior generally explained by relationship between buyers’ buyers’ preferences for a good (demand) (demand) and firms’ costs involved in bringing firms’ that good to market (supply). (supply).
3
MICROECONOMICS
How individuals and firms make economic choices among scarce resources
How these choices create markets
4
Economic Models
Simple theoretical descriptions-descriptions-capture essentials of how economies work
• As new, less fertile, land was cultivated, farming would require more labor for same yield
Increasing cost argument: now referred to as the Law of Diminishing Returns
15
B
0
3 4
1213
Uses of Microeconomics
Uses of microeconomic analysis vary. One useful way to categorize: by user type:
• Individuals making decisions regarding jobs, purchases, and finances; • Businesses making decisions regarding product demand or production costs, or • Governments making policy decisions about economic effects of various proposed or existing laws and regulations.
• Real economies too complex to describe in useful detail • Models are unrealistic, but useful
Maps unrealistic--do not show every house, unrealistic--do parking lot, etc. Despite lack of “realism,” realism,” maps show overall picture; help us get where we want to go; form mental image
• At point A, society can produce 10 units of food and 3 units of clothing
6
FIGURE 1-1: Production 1Possibility Frontier
Amount of food per week— lbs. 10 A
14
B
0
1213
FIGURE 1-1: Production Possibility Frontier 1Amount of food per week 10 9.5 A Opportunity cost of clothing = ½ pound of food
Opportunity cost of clothing = 2 pounds of food 4 2 Amount of clothing per week
9
Scarcity And Opportunity Costs
Opportunity cost: Cost of a good as measured by goods or services that could have been produced using those scarce resources
13
FIGURE 1-1: Production Possibility Frontier 1Amount of food per week (lbs.)
Opportunity cost of clothing = 2 pounds of food 4 2 Amount of clothing per week (articles)
Intermediate Microeconomics and Its Application
10th Edition
by
Walter Nicholson, Amherst College Christopher Snyder, Dartmouth College
PowerPoint Slide Presentation by Mark Karscig Central Missouri State University