Scribd
Upload
14 views14 pages

Lecture 2

The document discusses key microeconomic concepts including production possibilities, economic growth, gains from trade, and the circular flow model. It explains production efficiency on the production possibilities frontier and how economic growth occurs through technological change and capital accumulation despite scarcity remaining. Gains from trade are illustrated using an example of comparative advantage between two individuals.

Uploaded by

demro channel
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
14 views14 pages

Lecture 2

The document discusses key microeconomic concepts including production possibilities, economic growth, gains from trade, and the circular flow model. It explains production efficiency on the production possibilities frontier and how economic growth occurs through technological change and capital accumulation despite scarcity remaining. Gains from trade are illustrated using an example of comparative advantage between two individuals.

Uploaded by

demro channel
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 14

Introductory Microeconomics

Lecture 2- The Economic Problem


Dr. Rania Megally
Outline
• Production Possibilities
• Economic Growth
• Gains from Trade
• Circular-Flow Diagram
Production Possibilities
The production possibilities frontier (PPF ) is the boundary between
those combinations of goods and services that can be produced and those
that cannot.
Production Possibilities Frontier
▪ The PPF illustrates scarcity because we
cannot attain the points outside the
frontier. These points describe wants
that can’t be satisfied.
▪ We can produce at any point inside the
PPF or on the PPF
Production Efficiency
▪ We achieve production efficiency if we
produce goods and services at the
lowest possible cost. This outcome
occurs at all the points on the PPF.
▪ Production is inefficient inside the PPF
because resources are either unused or
misallocated or both.
▪ Every choice along the PPF involves a
tradeoff.
Economic Growth
▪ The expansion of production possibilities is
called economic growth. Economic growth
increases our standard of living, but it
doesn’t overcome scarcity and avoid
opportunity cost.
▪ Economic growth comes from
technological change and capital
accumulation.
▪ Technological change is the development
of new goods and of better ways of
producing goods and services.
▪ Capital accumulation is the growth of
capital resources, including human capital.
Gains from Trade
▪ People can produce for themselves all the goods and services that they
consume, or they can produce one good or a few goods and trade with
others. Producing only one good or a few goods is called specialization.
▪ A person has a comparative advantage in an activity if that person can
perform the activity at a lower opportunity cost than anyone else.
▪ A person who is more productive than others has an absolute
advantage.
▪ Absolute advantage involves comparing productivities—production per
hour—whereas comparative advantage involves comparing opportunity
costs.
Gains from Trade
Liza’s Production Possibilities Joe’s Production Possibilities

Liza’s opportunity cost of producing 1 Joe’s opportunity cost of producing 1


smoothie is 5 salads,
smoothie is 1 salad,
and and
Liza’s opportunity cost of producing 1 salad isJoe’s opportunity cost of producing 1 salad
1/5 of a smoothie.
is 1 smoothie.
Gains from Trade
▪ Liza should specialize in producing smoothies as she produces it with
lower cost related to Joe. She produces it for only 1 salad relative to 5
salads if Joe produced it

▪ Joe should specialize in producing salads as he produces it with lower


cost related to Liza. he produces it for only 1/5 of a smoothie relative to 1
smoothie if Liza produced it.
Circular-Flow Diagram Households:
▪ own the factors of production,
sell/rent them to firms for income.
▪ buy and consume goods & services.
Firms
Households
Firms:
▪ buy/hire factors of production
to produce goods and services.
▪ sell goods & services.
Mankiw and Rashwan “Principles of Economics Arab World Edition” 3rd edition. 2018
Circular-Flow Diagram
Revenue (=GDP) Spending (=GDP)
Markets for
G&S Goods &
G&S
sold Services bought

Firms Households

Factors of Labor, land,


production Markets for capital
Wages, rent,
profit (=GDP) Factors of Income (=GDP)
Mankiw and Rashwan “Principles of Economics Arab World Edition” 3rd edition. 2018
Production
Circular-Flow Diagram
The diagram omits the following:

▪ The government collects taxes, buys goods and services.


▪ The financial system matches savers’ supply of funds with borrowers’
demand for loans.
▪ The foreign sector trades goods and services, financial assets, and
currencies with the country’s residents.

Mankiw and Rashwan “Principles of Economics Arab World Edition” 3rd edition. 2018
Introduction
▪ Factors of production are inputs like labor, land, capital, and natural
resources.
▪ Factor payments are payments to the factors of production (e.g.,
wages, rent).

Mankiw and Rashwan “Principles of Economics Arab World Edition” 3rd edition. 2018
Readings
Chapter 2 in “Parkin 2012 Microeconomics 10th Edition Pearson.

Chapter 23 in “Principles of Economics” for N. Gregory Mankiw and Rashwan


(2012).

Mankiw and Rashwan “Principles of Economics Arab World Edition” 3rd edition.
2018

You might also like