Slides_Chapter 1.pptx

SAYRE // MORRIS
Ninth Edition
Jason Dean,Wilfrid LaurierUniversity
The Economic Problem
CHAPTER 1
© 2018 McGraw-Hill Ryerson Limited 1-1

2- 3
What is Economics
• Economics is the study of CHOICE
• We need to make choice because we can not
have everything that we want.
• Resources are limited
• Inability to satisfy all our needs is called
SCARCITY.
• SCARCITY ≠ Poverty
• Facing SCARCITY, we must choose among the
available alternatives.

Opportunity Cost
Opportunity Cost
– The value of the next-best alternative that is given up as a
result of making a particular choice
Scarcity Choice Opportunity Costs
forces involving
© 2018 McGraw-Hill Ryerson Limited 1- 4

What is Economics?
Microeconomics
– Outcomes of decisions by people and firms
– Supply and demand, costs of production, market
structures
Macroeconomics
– How the major components of an economy interact
– Unemployment, inflation, interest rates

Macro vs. Micro
MACRO MICRO
Prices Average of all products
Of particular
products
Production Of the whole economy Of a particular firm
Incomes Total national income
Of a profession or
group
Employment
Overall national
employment
By firm, industry or
occupation
Taxes For the government
For an individual or
firm

a. The price of iPods
b. Unemployment rates
c. The presence of monopolies
d. The rate of economic growth
TestYour Understanding
• Identify which of the following topics would likely appear
in a microeconomics course and which in
macroeconomics course.

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

Economic Resources and
Payments
RESOURCE EARNS
Labour Wages
Land Rent
Capital Interest
Enterprise Profit

• Indicate whether the resource in question is:
labour (L), capital (K), land (N), or enterprise (E):
a. A bar-code scanner in a supermarket
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

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 consumer goods

• 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

Three Fundamental Questions
1. What to produce
2. How to produce (technology)
3. For whom
– All economic societies must answer these questions.

Types of Economic Systems
1. Command
2. Competition
– Modern countries are usually a combination
of all of the above.

Economic Analysis
• Positive Analysis: Describes the world as it is.
Example 1: People buy more when price goes
down
Example 2: Prices rise when money supply
increases
• Normative Analysis: Describes how the world should
be.
Example 1:The govt. should cut tax to stimulate
the economy
Example 2: Poor people should get more income
support

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.
1-16

Economic Analysis
• Economic model is a highly simplified representation
of complicated reality. (Mathematical or Graphical)
• Assumptions simplify the complicated world
• Example:To study international trade, we assume two
countries and two goods exist → Highly unrealistic but
provide very strong insights.

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
• Productive efficiency

Table 1.1: Production of Breads and Guns (Millions of Units)
Breads Guns
Possible
Outputs
% of Resources
Used
Output
% of Resources
Used
Output
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

© 2018 McGraw-Hill Ryerson Limited 1-20
Table 1.2: Production Possibilities for Cars and Wheat
A B C D E F
Cars
0 50 90 120 140 150
Wheat
100 95 85 65 40 0

Figure 1.1
Unattainable
x
a
b
c
d
e
Wheat
Cars
Attainable
100
95
40
85
65
f
50 120
90 150
140
Points on the curve
represent maximum
output possible with
available resources
Table 1.2 Production Possibilities for Cars and Wheat
A B C D E F
Cars 0 50 90 120 140 150
Wheat 100 95 85 65 40 0

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

The Law of Increasing Costs
• Factors of production are not equally suitable
• As output increases, the per unit costs of
additional units increases
• Gives the production possibilities curve its
bowed out shape

Figure 1.2
a
Wheat
Cars
f
+40
-10
b
c
d
e
+30
-20
+20
-25
Law of Increasing Opportunity Costs
As more cars are produced,
an increasing amount of
wheat must be given up
100
95
40
85
65
50 120
90 150
140

Test Your Understanding
a) If society produces 1000 units of butter, how many guns can it
produce?
b) If society is at “b” on the PPC, what is the cost of 1000 more units
of butter?
Quantity
of
guns
per
period
Quantity of butter per period
400
300
150
1000 2000 3000
b
c
d
400 units of guns
100 units of guns
c to d – 150 guns per 1000
units of butter, therefore greater
b to c – 100 guns per 1000
units of butter
c) Is opportunity cost
greater for move from “c”
to “d” compared to a
move from “b” to “c”?

0
20
40
60
80
100
120
0 30 60 90 120 150 180
Quantity
of
wheta
per
period
Quantity of cars per period
PP1 PP2
PPC and Economic Growth
Growth means the
economy is able to
produce more of
everything

0
20
40
60
80
100
120
0 30 60 90 120 150 180
Quantity
of
wheta
per
period
Quantity of cars per period
PP1 PP2
a
b
c
d
PPC andTechnological Change
Improvement in
technology shifts the
curve to PP2.
Can now produce
more of either good,
or more of both.

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%.
a) 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?
Quantity per Year
A B C D
Grain 0 25 40 50
Tools 12 8 4 0

Solution
a
Grain
Tools
50
40
25
d
4 8 12
b
16 18
c
b2
c2
d2
PP2
New technology
allows a 50%
increase in tool
production

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