Chapter 1 introduces us to the science of economics and the economic perspective, that unique way of thinking. This economic way of thinking involves a number of critical and interrelated ideas.
opportunity cost -
marginal analysis -
scientific method -
macroeconomics/microeconomics -
positive and normative economics -
ceteris paribus (other things equal assumption) -
The remainder of Chapter 1 focuses on the economizing problem, the need to make choices. First we are introduced to a microeconomic model that explains the economizing problem faced by the individual (pages 7-10). Pay particular attention to the budget constraint model (Figure 1.1). Finally, we confront society's economizing problem and in particular the Production Possibilities Model (pages 11-17)
This simple model helps us understand some of the most fundamental
concepts in economics including scarcity, efficiency, opportunity cost, economic
growth and the implications of present economic decisions on our future standard
of living.
1. This economic system produces only two goods.
2. This economic system has a fixed quantity and quality of resources (factors of production) and a fixed level of technology (know how).
3.
This
economic system is operating at full production (meaning that all available resources are
employed AND are employed in their most productive manner). We cannot
squeeze anymore Robots or Pizzas out of our available resources, given the
existing technology.
Given these assumptions, you should understand and
be
able to explain the significance of five(5) situations represented by points on
the model. They are:
1.
Any point
on the Production Possibilties Curve represents a combination of these two goods
that is within the economy's production possibilities, given the assumptions of
the model. The science of economics does not say which point on the PPC is
"best." That is normative. However, the science of
economics does say that, in theory, there is some combination of these two goods
which will best satisfy society's economic wants. That point on the PPC
represents the most efficient allocation of society's scarce resources (allocative
efficiency). Pay particular attention to pages 13-14 and Figure 1.3.
2.
A
movement from one point to another on the PPC represents
an increase in the production of one good (a reallocation of resources).
However, a movement from one point to another always entails an opportunity
cost, which is measured in terms of how much of one good society must forego
or give up in order to have more of the other.
3.
Any point
outside the PPC
4.
Any point
inside the PPC represents an inefficient use of society's scarce resources.
We have resources that are either unemployed or not employed in their most
productive capacity.
5. A outward shift in the PPC represents economic growth (an increase in the economy's capacity or potential for production). Economic growth results from an increase in available resources (factors) and/or an improvement in technology
In our hypothetical, the tradeoff confronting this society was between Robots and Pizzas. But these two goods represent two classes of goods; namely capital goods and consumption goods. And, the tradeoff between these two classes of goods is of crucial importance in determining future economic growth and our standard of living. On pages 16 through 18, the author discusses how our "present choices" affect our "future production possibilities."
Pr
Practice problems: Use the production possibilities data below to answer the questions. Also, Key Question 10 on page 20 provides a good practice application.
Combination
A
B
C
D
E
Food
0
7 13
18
22
(b) A combination of 16 units of food and 2 units of clothing would be represented by a
point _________________. This combination would be ____________________.
(c) Five (5) units of food and three (3) units of clothing is a combination represented by a
point _________________ the PPC, and describes an economic system that ____________
__________________