Basic Economics Concepts

Lecturer ： Ava
Learning
Goals
0 Scarcity and Choice
1 --Scarcity
--Factors of Production
0 Macroeconomics VS Microeconomics
2 Normative economics VS Positive economics
Market Economy vs Command Economy

0 Opportunity Cost and Production Possibilities

3 Curve
Learning
Goals
04 Comparative Advantage and Gains from
Trade
--Absolute Advantage & Comparative Advantage
--Gain from Trade & Terms of Trade
Scarcity and Choice

Definitions:
• Scarcity （ the fundamental economic problem): a
situation that arises because people have unlimited needs
and wants in the face of limited resources.

• Needs: things that are essential for human survival, e.g.food

or shelter

• Wants: things that are not essential, e.g. a new car or

television
Scarcity and Choice--Factors of Production

Definitions:
• Resources (Factors of production): something used to
produce goods and services

 Land: all resources that come directly from nature, including

plants, all resources come from nature
water, and minerals
payment: rent

 Labor: is the effort that people contribute to the production

of goods and services
payment: wage
Scarcity and Choice--Factors of Production

Definitions:
 (Physical) Capital: the machinery, tools, technology and
buildings used for production
(Human) Capital: skills, knowledge, experience, and
education that 11individuals have
payment: interest / wage

** Captial ≠ Money
 Entrepreneurship: is the ability to combine the other
factors of production to satisfy society’s needs, wants and
desires
payment: profit
Macroeconomics VS Microeconomics

Macroeconomics: is the branch of economics that deals with the

structure, performance, behavior, and decision-making of the whole,
or aggregate, economy

Microeconomics: is more focused on the influences on and choices

made by individual actors—such as individuals, companies, and
industries—in the economy
Normative economics VS Positive
economics
Positive economics Normative economics
Definitions Describes and explains economic Involves value judgments about
phenomena based on facts and what the economy should be
cause-and-effect relationships. like.
What is it based data, facts, numbers opinions, values, beliefs
on?
Can it be Can be tested and proven true or Cannot be tested
verified/proved? false
Subjective or Objective Subjective
objective?
Ask which kind "what actually is" or "what actually "what ought to be" or "what
of question? was" or “what will be” should happen."
Use in Policy Helps predict the consequences of Guides the creation of policies
different policies. based on social goals and priorities.
Normative economics VS Positive
economics
 Disposable income has declined by 15% over the past four years. positive

 Raising tax on beer will have a negative effect on the profits of producers positive

 We must try to boost disposable income normative

 Market mechanisms should be allowed to work freely in order to make sure resources are best
allocated. normative

 Government has increased weekly working time by 8 hours. positive

 It is unfair to increase weekly working time by 8 hours. normative

 The government should raise the minimum wage normative

 Minimum-wage laws cause unemployment positive

Market Economy VS Command
Economy

 Economy: is a system of interrelated production and consumption

activities that ultimately determine the allocation of resources within a
group.

 Three Fundamental Economic Questions:

 What goods and services should be produced?
 How should the goods and services be produced?
 For who should the goods and services be produced?
Market Economy VS Command
Economy
Market Economy VS Command
Economy

IN a PURE COMMAND/ MARKET ECONOMY:

What goods and services should be produced?

Command economy: government
Market economy: interaction by consumers and producers

How should the goods and services be produced?

Command economy: government
Market economy: by firms who use available resources and efficient technology

For who should the goods and services be produced?

Command economy: government
Market economy: consumers who want them
Opportunity Cost and Production Possibilities
Curve
Definitions:

result result
Scarcity Trade-off Opportunity
Cost

Trade-off: Someone makes a trade-off when they give up something

to get something else.

Opportunity Cost: the value of the next best alternative that you
must give up when you make a particular choice

OC= （ Direct Monetary payment ） + Best Forgone Value

Opportunity Cost and Production Possibilities
Curve
Example:
 It’s Thursday night. You have an Economics test on Friday. You have a
choice- study for the test or go to a movie with friends.

Your Choice: Study Economics

Opportunity Cost:
Going to the Movie

 Now, it’s time for you to decide to go to college or seek a job. The tuition and fees of
college is $5,000. While the coffee full-time job income is $10,000, and the
restaurant full-time job income is $12,000.
Your Choice: Go to college
Opportunity Cost: Direct Monetary payment+Best Forgone Value
$5,000+$12,000=$17,000
Opportunity Cost and Production Possibilities
Curve
Definitions:
 Production Possibilities Curve: illustrates the trade-offs facing an
economy that produces only two goods.

 PPC Model:
a. Only 2 goods - consumer goods & capital goods
b. Potential output combinations: X+Y
c. Fixed resources: the quantity and quality of the factors of production
are fixed
d. Fixed technology: state of technology is constant
 Opportunity Cost and Production Possibilities
Curve

capital goods
Capital Goods Consumer Goods
Linear PPC=Constant Opportunity
A 5 0
Cost
A
5
B 4 2
B
C 3 4 4

D 2 6 C
3
E 1 8
F 0 10 D
2
E.g., the economy can produce a combination B
of a maximum of 4 capital goods and 2 E
1
consumer goods.
Slope of the curve F
=｜ 0 2 4 6 8 10 consumer
=Opportunity Cost of X-axis good goods
 Opportunity Cost and Production
Possibilities Curve

capital goods
Capital Goods Consumer Goods PPC concave to the
origin = Increasing
A 7 0 AOpportunity
B Cost
7
C
B 6.8 2 6 D
C 6.2 4
5
D 5.5 6 E
E 4.3 8 4

F 0 10 3
Eg: the economy can produce a combination B
2
of a maximum of 6.8 capital goods and 2
consumer goods. 1
Slope of the curve F
=｜ 0 2 4 6 8 10 consumer
=Opportunity Cost of X-axis good goods
Opportunity Cost and Production Possibilities
Curve
Law of Increasing Opportunity
Cost:

capital goods
Capit Change Consum Change Opportuni
al in er in ty Cost of 7 A B
Good capital Goods consum 1 C
s goods er consumer
goods good 6 D
A 7 0 5
E
B 6.8 - 0.2 2 2 4
0.1
C 6.2 -0.6 4 2
0.3 3
D 5.5 -0.7 6 2
0.35 2
E 4.3 -1.2 8 2
0.6
F 0 -4.3 10 2 1
2.15
F
0 2 4 6 8 10
consumer
goods
 Opportunity Cost and Production
Possibilities Curve
Crucial Points:
Output Level: combinations of two
goods
capital goods

A: 6 capital goods + 2 consumer goods

B: 6 capital goods + 4 consumer goods

6 C: 6 capital goods + 5 consumer goods

A B C

combinatio
combinations
combinations
of of
twotwo Are they all attainable?
ns of two
goods
goods
goods
Are their any
2 4 consumer goods
5
characteristics?
 Opportunity Cost and Production
Possibilities Curve
Crucial Points:
capital goods

Attainabl Productiv Resource Busines

e/ e s Cycle
Feasible Efficiency
Attainable/ Productive Inefficiently Recession/
A Feasible inefficiency (high Contraction
unemployment
A B C
Attainable/ Productive )Efficiently
B Feasible efficiency (full
combinatio employment)
combinations
combinations
of of
twotwo
ns of two
goods
goods Unattainable
goods
C /Infeasible

consumer goods
 Opportunity Cost and Production
Possibilities Curve
Crucial Points & Opportunity Cost:
Is there any opportunity cost if
capital goods

one company’s production

combination changes from A
B
to B or C?

A For B: no opportunity cost

C because the company doesn’t give
combinations
combinatio
of two goods up/ sacrifice anything.
ns of two
combinations of two
goods
goods For C: opportunity cost because
the company gives up some capital
consumer goods goods for more consumer goods
Opportunity Cost and Production
Possibilities Curve
Crucial Points & Opportunity Cost:

The graph above shows the C

production possibilities curves (PPC)
for an economy. The concept of
opportunity cost is best represented
by which of the following?

A. A shift from PPC1 to PPC2

B. A movement from point A to point
D
C. A movement from Point B to point C
D. A movement from Point C to point E
E. A movement from Point D to point B
Opportunity Cost and Production
Possibilities Curve
Economic Growth:
a sustained expansion of
the economy’s whole
Shift
production possibilities

capital
goods
outward!
a long-run output growth
of the whole economy 6
A B C

combinati
combinations of two
ons of two
goods
goods

2 4 consumer goods
Opportunity Cost and Production
Possibilities Curve
Biased Improvement:
A biased in a single good:
• a techonology improvement in
the consumer goods --> a shift
only for consumer goods

capital
goods
6

2 4 consumer goods
Opportunity Cost and Production
Possibilities Curve
Economic Growth:
What would be different if the government currently
uses biased resources or technologies in
consumer/capital goods? What happens to the economic
growth?

goods
capital
goods
capital

Future PPC
Current
position

Current PPC
Current Future PPC
PPC
Current
position
consumer goods consumer goods
Importance: consumer Importance: capital goods
Comparative Advantage and Gains
from Trade
Definitions:
• Absolute Advantage: describes a situation in which an
individual, business or country can produce more of a good or
service than any other producer with the same quantity of
resources. OR an individual, business or country can produce
the same quantity with a lower resources
• Comparative Advantage: describes a situation in which an
individual, business or country can produce a good or service at a
lower opportunity cost than another producer.
Comparative Advantage and Gains
from Trade
Opportunity Cost & Comparative Advantages:
Fish Banana

Ann 30 10
Bob 10 10
E.g., Anna can produce 30 fish or 10 bananas. Bob can produce 10 fish or 10
bananas.
OC per fish OC per banana

Ann 1/3 banana 3 fish

Bob 1 banana 1 fish

Comparative Advantage and Gains
from Trade
Opportunity Cost & Comparative Advantages:
Labor Units Required to Produce Computers and Shirts in Mexico and United States

1 computer 1 shirt
Mexico 12 labor 2 labor
United 1 labor 1 labor
States

OC per computer OC per shirt

Mexico 6 shirt 1/6 computer

United 1 shirt 1 computer
States
Comparative Advantage and Gains
from Trade
Gain from Trade:
• Trade: Individuals/countries/businesses provide goods and services
to others and receive goods and services in return.

• Specialization: each one specializes in the task that he or she is

good at performing

• Gain from Trade: Individuals/countries/businesses can get more

of what they want through trade than they could if they tried to be self-
sufficient
Comparative Advantage and Gains
from Trade

OC per Capital OC per

Good Consumer
capital
goods

Good
US PPC Korean 1/2 consumer 2 captial
goods goods
Korean PPC
30 US 4/3 consumer 3/4 capital
goods goods
20
• The US has absolute advantages in
both capital goods and consumer
goods.
• Korean has a comparative advantage in
capital goods.
• The US has a comparative advantage
10 40 consumer
in consumer goods.
goods
Comparative Advantage and Gains
from Trade
Terms of Trade:
Terms of Trade: indicate the rate at which one good can be
exchanged for another

OC per Capital OC per

Good Consumer Good
Korean 1/2 consumer 2 captial goods 1 consumer good =1 capital good
goods
US 4/3 consumer 3/4 capital goods
goods
Comparative Advantage and Gains
from Trade
U.S. Production Possibilities Korean Production Possibilities
Curve Curve

capital
capital

goods
goods

30

20 production
with trade
consumption
10 with trade 10 consumption with trade
9 production/ 8 production/ consumption
consumption production without trade
without trade with trade
28 30 40 consumer 6 10 consume
goods r goods
 Comparative Advantage and Gains
from Trade

What will happen if the US can produce more consumer

goods?
U.S. Production Possibilities OC per OC per
Curve
capital

Capital Good Consumer Good

goods

Korean 1/2 2 captial

30 consumer goods
goods
5/3 3/5 captial
US consumer goods
goods

If one gets better in

specialization, it will benefit
both two countries

50 consumer
goods
Summary

Resource<Needs & Gain and Give

Scarcit Wants Trade-off up Opportunity
y Cost
• Factors of Production

r atio
st
Illu
n
Trade PPC
• Comparative • Curve shape(opportunity cost)
advantages • Curve shift(economic growth)
• Points
Thanks for listening