Introduction

“본 강의자료는 연세대학교 학생들을 위해 수업목적으로 제작ㆍ게시된 것이므로

수업목적 외 용도로 사용할 수 없으며, 다른 사람들과 공유할 수 없습니다. 위반에
따른 법적 책임은 행위자 본인에게 있습니다.”

“This lecture material has been produced and published expressly for
lecture purposes in support of a Yonsei University course. This material
cannot be used for any other purposes and cannot be shared with others.
Individuals who violate these terms and restrictions are legally
responsible for any violation of intellectual property laws.”

ⓒ 2009 South-Western, a part of Cengage Learning, all rights reserved 1

Microeconomics and Macroeconomics HOW PEOPLE MAKE DECISIONS

 Economics is the study of how society manages its Principle #1: People Face Tradeoffs
scarce resources. In most societies, resources are
allocated through the combined actions of millions of All decisions involve tradeoffs. Examples:
households and firms.
 Going to a party the night before your midterm
 Microeconomics is the study of how households and leaves less time for studying.
firms make decisions and how they interact in markets.
 Having more money to buy stuff requires working
 Macroeconomics is the study of economy-wide longer hours, which leaves less time for leisure.
phenomena, including inflation, unemployment, and
economic growth.  Protecting the environment requires resources
that could otherwise be used to produce
 These two branches of economics are closely
intertwined, yet distinct – they address different consumer goods.
questions.
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 HOW PEOPLE MAKE DECISIONS HOW PEOPLE MAKE DECISIONS
Principle #2: The Cost of Something Is Principle #2: The Cost of Something Is
What You Give Up to Get It What You Give Up to Get It
 Making decisions requires comparing the costs Examples:
and benefits of alternative choices. The opportunity cost of…
 The opportunity cost of any item is …going to college for a year is not just the tuition,
whatever must be given up to obtain it. books, and fees, but also the foregone wages.

 It is the relevant cost for decision making. …seeing a movie is not just the price of the ticket,
but the value of the time you spend in the theater.

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HOW PEOPLE MAKE DECISIONS HOW PEOPLE MAKE DECISIONS

Principle #3: Rational People Think at the Principle #3: Rational People Think at the
Margin Margin

Rational people Examples:

 systematically and purposefully do the best they  When a student considers whether to go to
can to achieve their objectives. college for an additional year, he compares the
 make decisions by evaluating costs and benefits fees & foregone wages to the extra income
of marginal changes – incremental adjustments he could earn with the extra year of education.
to an existing plan.  When a manager considers whether to increase
output, she compares the cost of the needed
labor and materials to the extra revenue.

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 HOW PEOPLE MAKE DECISIONS Assumptions & Models
Principle #4: People Respond to Incentives  Assumptions simplify the complex world,
 Incentive: something that induces a person to make it easier to understand.
act, i.e. the prospect of a reward or punishment.  Example: To study international trade,
 Rational people respond to incentives. assume two countries and two goods.
Unrealistic, but simple to learn and
Examples:
gives useful insights about the real world.
 When gas prices rise, consumers buy more
hybrid cars and fewer gas guzzling SUVs.  Model: a highly simplified representation of
 When cigarette taxes increase, a more complicated reality.
teen smoking falls. Economists use models to study economic
issues.

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A Simple Model: PPF Example

The Production Possibilities Frontier  Producing one computer requires 100 hours labor.
 The Production Possibilities Frontier (PPF):  Producing one ton of wheat requires 10 hours labor.
a graph that shows the combinations of
Employment of
two goods the economy can possibly produce Production
labor hours
given the available resources and the available
Computers Wheat Computers Wheat
technology
A 50,000 0 500 0
 Example:
 Two goods: computers and wheat B 40,000 10,000 400 1,000

 One resource: labor (measured in hours) C 25,000 25,000 250 2,500

 Economy has 50,000 labor hours per month D 10,000 40,000 100 4,000
available for production.
E 0 50,000 0 5,000
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 PPF Example ACTIVE LEARNING 1
Points off the PPF
Wheat
Point Production
(tons) A. On the graph, find the point that represents
on Com- 6,000 (100 computers, 3000 tons of wheat), label it F.
graph puters Wheat E
5,000 Would it be possible for the economy to produce
A 500 0 D this combination of the two goods?
4,000
B 400 1,000 Why or why not?
3,000 C
C 250 2,500
2,000 B. Next, find the point that represents
D 100 4,000 B (300 computers, 3500 tons of wheat), label it G.
1,000
E 0 5,000 A Would it be possible for the economy to produce
0
0 100 200 300 400 500 600
this combination of the two goods?
Computers

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ACTIVE LEARNING 1 ACTIVE LEARNING 1

Answers Answers
Wheat Wheat
 Point F: (tons)  Point G: (tons)
100 computers, 6,000 300 computers, 6,000
3000 tons wheat 5,000
3500 tons wheat 5,000
 Point F requires 4,000  Point G requires 4,000 G
40,000 hours 65,000 hours
3,000 3,000
of labor. F of labor.
Possible but 2,000 2,000
Not possible
not efficient: 1,000 because 1,000
could get more 0 economy 0
of either good 0 100 200 300 400 500 600 only has 0 100 200 300 400 500 600
w/o sacrificing Computers 50,000 hours. Computers
any of the other.
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 The PPF: What We Know So Far The PPF and Opportunity Cost
Points on the PPF (like A – E)  Recall: The opportunity cost of an item
 possible is what must be given up to obtain that item.
 efficient: all resources are fully utilized  Moving along a PPF involves shifting resources
Points under the PPF (like F) (e.g., labor) from the production of one good to
 possible the other.
 not efficient: some resources underutilized  Society faces a tradeoff: Getting more of one
(e.g., workers unemployed, factories idle) good requires sacrificing some of the other.
Points above the PPF (like G)  The slope of the PPF tells you the opportunity
 not possible cost of one good in terms of the other.

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The PPF and Opportunity Cost ACTIVE LEARNING 2

The slope of a line
PPF and Opportunity Cost
Wheat
(tons) equals the In which country is the opportunity cost of cloth lower?
–1000 “rise over the run,”
6,000 slope = = –10 FRANCE ENGLAND
100 the amount the line Wine Wine
5,000
rises when you 600 600
4,000
move to the right 500 500
3,000 by one unit. 400
400
2,000
Here, the 300 300
1,000 opportunity cost of 200 200
0 a computer is 100
100
0 100 200 300 400 500 600 10 tons of wheat.
0 0
Computers
0 100 200 300 400 0 100 200 300 400
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 ACTIVE LEARNING 2 Economic Growth and the PPF
Answers
With additional Wheat
England, because its PPF is not as steep as France’s. Economic
resources or an (tons)
growth shifts
FRANCE ENGLAND improvement in 6,000
Wine
the PPF
Wine technology, 5,000 outward.
600 600
the economy can 4,000
500 500 produce more
3,000
400 400 computers,
more wheat, 2,000
300 300
or any combination 1,000
200 200
in between. 0
100 100
0 100 200 300 400 500 600
0 0
Computers
0 100 200 300 400 0 100 200 300 400
Cloth Cloth20 21

The Shape of the PPF Why the PPF Might Be Bow-Shaped

 The PPF could be a straight line, or bow-shaped
As the economy

Beer
 Depends on what happens to opportunity cost shifts resources
as economy shifts resources from one industry from beer to
to the other. mountain bikes:
 If opp. cost remains constant,  PPF becomes
PPF is a straight line. steeper
(In the previous example, opp. cost of a
 opp. cost of
computer was always 10 tons of wheat.)
mountain bikes
 If opp. cost of a good rises as the economy increases
produces more of the good, PPF is bow-shaped. Mountain
Bikes
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 Why the PPF Might Be Bow-Shaped Why the PPF Might Be Bow-Shaped

At point A, At A, opp. cost of At B, most workers

Beer

Beer
A mtn bikes is low. At B, opp. cost
most workers are are producing bikes.
of mtn bikes
producing beer, The few left in beer is high.
even those that are the best brewers.
are better suited Producing more B
to building bikes. bikes would require
So, do not have to shifting some of the
give up much beer to best brewers away
get more bikes. from beer production,
would cause a big
Mountain Mountain
drop in beer output.
Bikes Bikes
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Why the PPF Might Be Bow-Shaped The PPF: A Summary

 So, PPF is bow-shaped when different workers  The PPF shows all combinations of two goods
have different skills, different opportunity costs that an economy can possibly produce,
of producing one good in terms of the other. given its resources and technology.
 The PPF would also be bow-shaped when
there is some other resource, or mix of
 The PPF illustrates the concepts of
tradeoff and opportunity cost,
resources with varying opportunity costs
efficiency and inefficiency,
(E.g., different types of land suited for
unemployment, and economic growth.
different uses).
 A bow-shaped PPF illustrates the concept of
increasing opportunity cost.

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