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Midterm _PoE_Topic 1_Sp22-23

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8 views

Midterm _PoE_Topic 1_Sp22-23

Uploaded by

SAKIB SADMAN
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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TOPIC 1

Introduction:
Thinking Like
an Economist
Definition of Economics

Scarcity is the fundamental economic problem of


having seemingly unlimited human wants in a
world of limited resources.

It states that society has insufficient productive


resources to fulfill all human wants and needs.
Definition of Economics

• According to Prof. Lionel Robbins,


Economics is the science which studies
human behavior as a relationship
between ends and scarce means which
have alternative uses”.

Economics is the study of how society


manages its scarce resources
Microeconomics and
Macroeconomics

Economics is divided into two subfields:


 Microeconomics focuses on the
individual parts of the economy
-How households and firms make
decisions and how they interact in specific
market
Macroeconomics looks at the economy
as a whole.
-Economy-wide phenomena, including
inflation, unemployment, and economic
growth
Microeconomics

Microeconomics deals with the behavior


of individual economic units.
• Microeconomics explains how and why
these units make economic decisions.
• These economic units include
consumers, workers, investors, owners
of land, business firms.
• How consumers make purchasing
decisions, how firms decide how many
workers to hire.
Economy: In Microeconomics

The word economy comes from a Greek


word “Oikonomia” which basically means
“one who manages a household.”
A household and an economy face many
similar decisions:
• Who will work?
• What goods and how many of them should be
produced?
• What resources should be used in production?
• At what price should the goods be sold?

Reiterating : Economics is the study of


how society manages its scarce
resources.
Positive Versus Normative
Statements

Economic analysis: Economist use two


types of statements for analysis:

Positive statements are statements that


attempt to describe the world as it is.
- Called descriptive analysis

Normative statements are statements


about how the world should be.
- Called prescriptive analysis
Positive or Normative Statements?

- An increase in the minimum wage will cause a


decrease in employment among the least-skilled.
(POSITIVE)
- Higher federal budget deficits will cause
interest rates to increase. (POSITIVE)
- The income gains from a higher minimum wage
are worth more than any slight reductions in
employment. (NORMATIVE)
- State governments should be allowed to collect
from tobacco companies the costs of treating
smoking-related illnesses among the poor.
(NORMATIVE)
Basic Problem of Economics

There are three basic problems:

 What commodities should be produced and in


what quantities?

 How shall goods be produced (by whom and


with what resources and in what technical
manners to be produced)?

 For whom shall goods be produced?


Economic Models

Economists use models to simplify reality in order to


improve our understanding of the world.

The most basic economic models include:

The Production Possibilities Frontier

It is used to solve the basic problems in economics.


Assumptions of PPF

1. Full employment and full production.

2. Available supply of factors of production


(Land, Labor, Capital and Entrepreneurship)
are fixed but they can be shifted or
reallocated.

3. State of technology does not change.


Alternative Production Possibilities

Production Possibilities Schedule


Possibilities Sugar Pizza
(millions of pounds) (thousands)
A 0 15
B 1 14
C 2 12
D 3 9
E 4 5
F 5 0
Model: The Production Possibilities
Frontier

The production possibilities frontier is a graph


that shows the various alternative combination
of the two commodities that a country can
produce most efficiently by fully utilizing its
factor of production with the available
technology.

 It was introduced by Prof. Paul A. Samuelson.


Production Possibilities Frontier

Every point along the curve is efficient; points outside the


curve are unobtainable or inefficient
Shifts in the PPF
Causes of Shifts in the PPF

Shifts in the production possibilities curve


are caused by changes in these things:

• Advances in technology
• Changes in resources
• More education or training (that's what
we call human capital)
• Changes in the labor force
Production Possibilities Frontier

Concepts Illustrated by the Production


Possibilities Frontier :
• Efficiency
• Trade-offs
• Opportunity Cost
• Economic Growth

Significance of PPF:
 Where shall the choice of society lie?
 It helps to solve 3 basic problems : what to
produce; how to produce; for whom to
produce.
 To study economic development.
The End

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