2021 – 2022
(Bio-)economics
Lecture 1: introductions to economics
1. Why economics?
▪ To understand everyday life
▪ To understand society / be an informed citizen
▪ To learn a way of thinking
2.The economic problem of scarcity & choice
▪ Scarcity and choice
o Resources are limited …
▪ Natural resources: land, minerals, timber, biodiversity, climate, …
▪ Capital resources: machinery, buildings, roads, software,…
▪ Human resources, labor time, skills & talents, worker’s health,…
… we need to choose among competing uses of these resources…
▪ People forced to choose among competing uses or resources
▪ Fundamental concern of economics: how to allocate scare resources
▪ (cause there’s always a second, third,… best option)
… we make constrained choices beperkte keuzes, these determine:
1. What gets produced
2. How it is produced
3. Who gets what is produced
▪ Opportunity cost: the best alternative that we forgo, or give up, when we make a choice or
decision
o Everything has an opportunity cost, even going to a movie
o A cost ≠ an expenditure in money
o For kids in poor countries: the OC becomes too high to go to school, they need to work
Consider a very simple 1-person small island economy
▪ Recourses (land, time, skills, … are limited
▪ Economic decisions: choose to allocate time to go hunting, collecting berries, collecting wood,
fishing, building shelter ,…
▪ Preferences: basic needs: water, food, shelter,…
o If he collects wood: he has a shelter and fire to keep himself warm, but NO food
o Opportunity costs: the food he forgoes because he’s not collecting food
➢ Even in an 1-person economy there’s and opportunity costs and trade-offs (choices to be made)
Consider 1 extra person in the small island economy (2-person)
▪ Recourses still limited, only time has doubled (2 persons)
▪ Persons are not the same: choices become more complex
o Preferences, skills & talents, may differ
o The can cooperate, take the lead or split up
➢ Opportunities arise through specialization and exchange
Each does where they’re best in, then they create more opportunities
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2.1 Specialization and exchange
Theory of comparative advantage
Specialization and trade will benefit all trading parties
▪ Society and people in society get better of when they specialize in the things that they are good in
and exchange with each other
→ Idea: David Ricardo (1772-1823)
Absolute advantage:
▪ A producer has an absolute advantage in the production of something if they can produce that
good or service cheaper in absolute cost than someone else can
Comparative advantage:
▪ A producer has a comparative advantage over someone else in the production in the specific good
or service if that person can produce that product at a lower opportunity cost
▪ Think about coffee beans, impossible to plant in Belgium
▪ This leads to exchange
Consider a 2-person small island economy
▪ Production possibilities in 1 year on the island:
o Person A can produce 600 kg food/ year OR 200 logs of wood/year
o Person B can produce 200 kg of food/year OR 600 logs of wood/year
▪ Can be depicted in production possibility frontiers afbeelden met productiemogelijkheidgrenzen
Production possibility frontier:
▪ Combination of all goods and services that can be produced if the resources are used
efficiently
Production possibility curve for A Production possibility curve for B
250 800
Wood (logs)
Wood (logs)
200 600
150
400
100
50 200
0 0
0 300 600 0 100 200
Food (kg) Food (kg)
A B
▪ A has an absolute advantage in the production of food
▪ B has an absolute advantage in the collection of wood
▪ If A&B dot not exchange with each other AND A&B prefer the amounts of food & wood
A&B each produce & consume 150 kg food and 150 logs wood
A B
Food 25% of the time · 600 kg/year = 150 kg 75% of the time · 200 kg/year = 150 kg
Wood 75% of the time · 200 logs/year = 150 kg 25% of the time · 600 logs/year = 150 kg
▪ 150 is their consumption level, or level of well being , well fair level
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Production possibility curve for A Production possibility curve for B
250 800
Wood (logs)
Wood (logs)
200 600
150
400
100
50 200
0 0
0 300 600 0 100 200
Food (kg) Food (kg)
A B
▪ Point C is where they are producing and consuming
▪ Resources are constrained: they are constrained by their own production possibility
▪ Point C will never be higher than the graphic
▪ If A&B do exchange with each other (assuming = preferences for food & wood)
o A specializes in food: producing 600 kg, B specializes in wood: 600 logs
Production A B
Food 100 % of the time · 600 kg/year = 600 kg 0% of the time
Wood 0% of the time 100 % of the time · 600 logs/year = 600 kg
o A&B negotiate a price (how much food for how much wood)
▪ Price = 1/3 kg of food for 1 log of wood: barely acceptable for B
▪ Price = 3 kg of food for 1 log of wood: barely acceptable for A
o If A&B have equal negotiation power, they will agree on a price of 1 kg of wood for 1 log
of wood → let’s assume this
▪ A&B will exchange 300 kg of food for 300 log of wood :
(exchange)consumption A B
Food (“sell”)300 kg (“buy”)300 kg
Wood (“buy”)300 logs (“sell”)300 logs
o They both have doubled their consumption level, income level, their well being
o Doing what you’re good in and exchanging with each other allows you be at a
higher income level
Production possibility curve for A Production possibility curve for B
250 800
Wood (logs)
Wood (logs)
200 600
150
400
100
50 200
0 0
0 300 600 0 100 200
Food (kg) Food (kg)
A B
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▪ If A & B do exchange with each other: price negotiation:
A has negotiation power: B has negotiation power:
o Assume price of 1/3 kg of food for 1 log of o Assume price of 3 kg’s of food for 1 log of
wood wood
o Exchange 450 kg of food for 150 logs of o Exchange 150 kg of food for 450 logs of
wood wood
o A’s consumption triples but B’s remains- o A’s consumption remains but B’s triples
price just (not) acceptable for B price just (not) acceptable for A
Consumption A B Consumption A B
Food 450 kg 150 kg Food 150 kg 450 kg
Wood 450 logs 150 logs Wood 150 logs 450 logs
Production possibilities in 1 year on the island:
▪ Person A can produce 600 kg food/ year OR 600 logs of wood/year
▪ Person B can produce 100 kg of food/year OR 300 logs of wood/year
▪ Production possibility frontiers:
Production possibility curve for A Production possibility curve for B
800 400
Wood (logs)
Wood (logs)
600 300
400 200
200 100
0 0
0 300 600 0 50 100
Food (kg) Food (kg)
A A
A: absolute advantage in production of food and wood
B: no absolute advantage
▪ Absolute versus comparative advantage:
Absolute:
o A: absolute advantage in production of both food and wood bc he can produce food and
wood at a lower absolute cost than person B
→ A: cost of producing 1 kg of food is 365days/600 kg = 0.6 days
→ A: cost of collecting 1 log of wood is 365 days/600 logs = 0.6 days
o B: no absolute advantage because he can’t produce food nor wood at a lower absolute
cost than person A:
→ B: cost of producing 1 kg of food is 365 days/100 kg = 3.65 days
→ B: cost of collecting 1 log wood is 365 days/ 300 logs = 1.21 days
Comparative:
o A: comparative advantage in production of food because he can produce food at a lower
opportunity cost than person B
→ A: opportunity cost of producing 1 kg of food is 1 log of wood
→ A: opportunity cost of producing 1 log of wood is 1 kg of food
o B: comparative advantage in collection of wood because he can produce wood at a lower
opportunity cost than person A
→ B: opportunity cost of producing 1 kg of food is 3 logs of wood
→ B: opportunity cost of collecting 1 log of wood is 1/3 kg of food
▪ If A&B do not exchange with each other:
o A: produces and consumes 300 kg of food and 300 logs of wood
o B: produces and consumes 75 kg of food and 75 logs of wood
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