ECONOMICS LEC1

Elijahqi-blog

Definition of economics

opportunity cost

The opportunity cost of an action is the value of the next-best alternative
that must be given up in order to undertake that action.

the loss of other alternatives when one alternative is chosen.
even the first choice is the same the opportunity cost is different

Production possibility frontier

production efficiency

Production efficiency is an economic level at which the economy can no longer produce additional amounts of a good without lowering the production level of another product. This happens when an economy is operating along its production possibility frontier

downward sloping

downward sloping-> opportunity cost

concave to origin

increase opportunity cost
why this?
the resource is not uniform
Initially shifted into producing another good,is who can produce better
however,when the number is increasing,

characteristics of ppf

1. scarcity

The existence of the production possibility boundary shows the existence of scarcity. In other words, if there is no scarcity, there will be no restrictions on the products that can be produced, and there will be no production possibility boundary. Therefore, the boundary of production possibility actually embodies scarcity.
2. choise
Scarcity forces people to make choices. From the point of view of the production possibility boundary, the choice is to decide which point to produce according to the production possibility boundary, that is, which combination of the two products is produced. Choice depends on individual preferences (Crusoe’s preferences, which are in fact the combination of his need for survival and his desire for consumption). This also depends on the degree of preference for each product. For the purpose of maximizing the degree of consumer satisfaction, people will make rational choices, that is to say, they can achieve this maximized choice. Therefore, the choice can be concretized by using the production possibility boundary.
3. opportunity
The tilt of the production possibility boundary to the lower right indicates that the cost of choice is opportunity cost, that is, when resources and technology are fixed, one unit more of a product will produce one unit less of another product. Some units abandoned to produce more one unit of a product. Another product is the opportunity cost of producing more one unit of a product. This opportunity cost must be paid when choosing to produce more than one unit of a certain product. The meaning of opportunity cost can be better explained by the production possibility boundary.

what,how,and for whom

What to produce: Should we produce cars, food, houses, medical services … ? What is the output level of each product or service?

How to produce: What is the method of production for each product? Labor intensive or capital intensive?

For whom the produce: Who can enjoy the outputs? This is the problem of distribution.

In the command economy, the economic decisions are made by the central government.
In the market economy, most economic decisions are guided by the market system.

benefit

The benefit from something is the gain or pleasure that it brings,measured by what you are willing to give up to get it.

cost

The cost is what you must give up

capital

Capital is a term for financial assets, such as funds held in deposit accounts, as well as for the physical factors of production; that is, manufacturing equipment. Additionally, capital includes facilities, including buildings used to produce and store manufactured goods. Materials used and consumed as part of the manufacturing process do not qualify as capital.

cost-benefit principle

An individual (or a decision unit) should take an action, if and only if, the marginal (incremental) benefits from taking the action are at least as great as the marginal (incremental) cost.

sunk cost

the costs that cannot be recovered at the moment a decision is made

example of sunk cost

You bought a house at the cost of $1.1 million in the beginning of 2018.
The current price of the house is $1 million. You expect (100% sure) that the price of the house will be $1.15 million in the end of 2019.

Should you sell the house now or wait until the end of 2019?

Notice that the sunk cost of $1.1 million (or the loss of $0.1 million for selling the house now) is irrelevant to your decision making. Instead, you should consider the benefit of using the $1 million from selling the house now. If you can receive more than $1.15 million (at the end of 2019) from the use of this $1 million (with similar risk), then you should sell the house now.