Microeconomics Economics 0105 Dr Mc Gahagan Course web

Microeconomics Economics 0105 Dr. Mc. Gahagan Course web page: http: //www. pitt. edu/~upjecon

Textbook: Principles of Microeconomics by Robert Frank and Benjamin Bernanke (New York, Mc. Graw Hill, 2000) At the UPJ bookstore now

Scarcity. . . the fundamental problem of economics Resources are limited. . . wants are not White Sands, New Mexico in the 1950 s, during a water shortage photo from National Park Service

Projected water scarcity (R. Svadlenka, "The emerging water crisis") Color codes: Green => "little or no scarcity" Red => "Physical water scarcity" Orange => "Economic scarcity" In economics, ALL COUNTRIES face economic scarcity

This photo illustrated an article on water scarcity on the island of Corfu (Greece). No physical scarcity of water. . . but no USABLE water. Scarcity is always relative to human wants, hence it is always with us.

Is West Nile Virus “Scarce”? In US in 2002 (to Aug. 23) – 371 cases, 16 deaths http: //www. cdc. gov/od/oc/media/wncount. htm

“Scarcity” means scarcity of “goods”; West Nile Virus is “rare”, but not “scarce”

Resources are limited; wants are unlimited Scarcity = not enough resources to produce the goods to satisfy our wants. Resources: Adam Smith in his Wealth of Nations (1776) divided resources into land, labor and capital. http: //www. adamsmith. org/smith/won-intro. htm

Adam Smith’s 3 resources: Land, Labor and Capital 1. LAND: used as shorthand for any natural resource, not simply for agricultural land. 2. LABOR: manual power + skill ("human capital") 3. CAPITAL: produced means of production for example, hammers, drill presses, computers. . . or even flint arrowheads of American Indians, which Smith used as an example. Although money is used to BUY all the above, money is not itself a productive resource. Capital grows through investment – and requires foregoing current consumption. The Indian must take time away from gathering berries to make the arrowheads.

Identify the resources: Buena Vista Farm, Kern County, CA, around 1885 (Library of Congress)

Identify the resources: Barthelemy L'Anglais, Le Livre des Proprietes des Choses 15 th century. Bibliotheque Nationale, France.

Identify the resources: land, labor, capital Trawling for shrimp (NOAA website)

Identify the resources: land, labor, capital Gathering coal from a slag heap, Nanty Glo, 1937 (Photo by Ben Shahn, Library of Congress website)

Identify the resources: land, labor, capital Electric furnace, Allegheny Ludlum (1941)

Scarcity means that choices are necessary. When you can’t have all you want of everything, you must make choices. Microeconomics is the study of how to make the best possible ( or the optimal) choice under the constraint of limited resources.

Choices always involve tradeoffs Because of the scarcity of resources, we can have more of one thing only if we are willing to do with less of another. The tradeoffs are very evident in wartime – the following slide shows Cadillacs from 1944 and 1946. The productive resources in the lower pictures could be used to make either tanks or cars.

Cadillacs. . . 1944 and 1946 Opportunity cost of tank = 10 passenger autos M 5 Tank Cadillac Coupe

Tradeoffs and the Production Possibility Frontier Economists would want to develop a more precise model of the tradeoffs involved – And that model can be represented graphically by a “Production Possibility Frontier”, showing the choices which are -- possible (on or within the frontier) -- efficient (exactly on the frontier) -- inefficient (within the frontier) -- impossible (beyond the frontier)

M 5 tanks 500 The tank-auto trade-off: an economist's view using the Production Possibility Frontier Autos 5, 000

M 5 tanks The tank-auto PPF: one POSSIBLE point is (2000 autos, 300 tanks) 500 is 300 another POSSIBLE point (4000 autos, 100 tanks) Autos 2, 000 5, 000

M 5 tanks 500 The tank-auto PPF: an IMPOSSIBLE point is (4000 autos, 300 tanks) 300 Autos 4, 000 5, 000

M 5 tanks 500 200 an INEFFICIENT point is (1000 autos, 200 tanks) 1, 000 Autos 5, 000

M 5 tanks 500 The tank-auto equation: TANKS = 500 – 0. 1 AUTOS Check out a few values: AUTOS 0 1000 2001 TANKS 500 400 300 299. 9 Autos 5, 000

M 5 tanks Equation in general form: TANKS = a + b AUTOS 500 How to find the equation from the graph: 1. a = Y-INTERCEPT = 500 2. b = SLOPE = rise over run = - 500 divided by 5000 = - 0. 1 Autos 5, 000

M 5 tanks What the intercept means: TANKS = 500 – 0. 1 AUTOS 500 IF we produced zero autos, we could produce up to 500 tanks, since TANKS = 500 – 0. 1 (0) = 500 Autos 5, 000

M 5 tanks 600 What happens when the intercept changes: TANKS = 600 – 0. 1 AUTOS IF we produced zero autos, we could produce up to 600 tanks, since TANKS = 600 – 0. 1 (0) = 600 The PPF would shift OUT and parallel to itself. 500 This might be due to an increase in the resources available for production – for example, an increase in the labor force, and a new assembly line in the factory Autos 5, 000 6000

M 5 tanks 500 What the slope means: TANKS = 500 – 0. 1 AUTOS IF we were producing 2000 autos and 300 tanks and if we decided to produce one more auto, we would have to reduce tank production to 299. 9 The OPPORTUNITY COST of an auto is one-tenth of a tank. Autos 5, 000

M 5 tanks 500 What happens when the slope changes: TANKS = 500 – 0. 05 AUTOS If autos = 0, TANKS = 500 If autos = 5, 000, TANKS = 250 If autos = 10, 000, TANKS = 0 The possibility exists of producing more autos – perhaps some way of producing auto transmissions (but NOT tank transmissions) more rapidly has been discovered. Autos 5000 10, 000

Costs and benefits The Production Possibility Frontier shows us the economically efficient possibilities, but does not help us choose among them. To choose, we must weigh costs and benefits: take an action (move along the PPF) if and only if the EXTRA benefits of the action are at least as great as the EXTRA costs.

Scarcity and use of time Exercise: Draw PPF for 1. Studying/Partying 2. Studying/Working Think about intercepts, actual point chosen.

Opportunity cost Consider the last slide: 1. What is the opportunity cost of studying? 2. What is the opportunity cost of working? 3. Why do rational people make different choices?