Transcript Economics - Cloudfront.net

Economics:
a crash course
My first attempt at
graphing
A Bit of Levity to Start
Economics: The Dismal Science
•
A term coined by
Victorian economist
Thomas Carlyle
•
Was coined in
reference to two
ideas:
1. Thomas Malthus’
theory on population
2. The liberation of
black slaves in the
West Indies
Economics: The Dismal Science
•
In Occasional Discourse
on the Negro Question
he wrote that economics
was, “Not a ‘gay
science,’ I should say,
like some we have
heard of; no, a dreary,
desolate and, indeed,
quite abject and
distressing one; what
we might call, by way of
eminence, the dismal
science.”
Economics: The Dismal Science
•
In this book Carlyle
was arguing for the
reintroduction of
Slavery into the
Indies because he
felt the slaves had a
higher living and
moral standard in
slavery than in a free
market with the
forces of supply and
demand
Economics: The Dismal Science
•
What does Carlyle’s
take on economics
tell us about the
discipline?
So what is economics?
• The study of how to
allocate scarce
resources among
competing ends
• Ideally economics
studies how to make
the best choices
under conditions of
scarcity
• It also assumes
rationality
So what is economics?
• Now think of
examples of decisions
that are made on
each of the following
levels:
–
–
–
–
Individual Child
Individual Adult
Business
Government
So what is economics?
• Is there anything that
you cannot apply
economics to?
• What does utility
mean and can we
always apply this to
our lives?
Macro vs. Microeconomics
• Macroeconomics
studies the economy
as a whole or
aggregates of parts
of the economy
(consumers, households,
businesses)
• Microeconomics
studies the individual
unit (a person, a
household, an industry)
• We will be focusing on
macroeconomics
Positive vs. Normative Economics
• Positive economics
tries to look at the
economy as it is
• Normative
economics tries to
look at the economy
as it should be
• Most disagreement
happens within
normative economics
Positive vs. Normative Economics
• What would be an
example of a positive
economics
statement about the
current economy?
• What would be an
example of a
normative
economics
statement about the
current economy?
Opportunity Cost
• What do you think this
term means?
Opportunity Cost
• What do you think this
term means?
• It is the value of the
best alternative
sacrificed as opposed
to what actually takes
place
• Examples???
Opportunity Cost
• How do we see an
example of
opportunity cost in
America’s
involvement in World
War II?
Opportunity Cost
• How do we see an
example of
opportunity cost in
America’s
involvement in World
War II?
• Guns or Butter
Marginal Analysis of Benefits and Costs
• How do we determine if
the opportunity cost is
worth it?
• We analyze!!!
• What is the marginal
benefit of more guns?
What is the marginal
cost?
• What is the marginal
benefit of more butter?
What is the marginal
cost?
Marginal Analysis of Benefits and Costs
• Important to
remember- most
decisions are not all
or nothing
• Usually not zero sleep
and an A on the test
or a full night’s sleep
and a zero on the test
• We think around the
margins
Quick review
•
•
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What is economics the study of?
How are macro and micro different?
How are positive and normative different?
What is an opportunity cost?
What is a marginal benefit? Marginal cost?
Production Possibilities
• What factors does the
production of goods
depend upon?
Production Possibilities
• The Factors of
Production are:
• Labor- physical and
mental effort
• Human Capitalknowledge and skills
• Entrepreneurshiprisk taking in pursuit
of rewards
• Natural Resources/
Land- anything from
nature
• Capital- goods used
in the production
process
Imagine this scenario:
• You’re starting a
business making toy
guns and butter
• You can make ten toy
guns or 100 sticks of
butter or any
combination of the
two
• Can we graph this
situation?
Imagine this scenario:
• Now let’s compare to
a real production
possibilities curve
Production Possibilities Curve (or Frontier)
What was similar or different about yours?
What accounts for the differences?
What accounts for the differences?
• The Law of Increasing
Opportunity Cost: as
the production of a good
increases, the opportunity
cost of producing an
additional unit rises
• Look at the difference
between B-D and then
from D-C
• Why is this the case?
What accounts for the differences?
• Resources are not
completely adaptable
• When we shift from B to
D, we allocate to butter
resources that are more
suited to butter
production
• When we move from D to
C, we allocate to butter
resources more suited to
gun production
• Think about land in this
case
Quick review
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What is economics the study of?
How are macro and micro different?
How are positive and normative different?
What is an opportunity cost?
What is a marginal benefit? Marginal cost?
What is the law of increasing opportunity
costs? (Why does the product possibilities
chart curve instead of going straight?)
Let’s look at the graph further
• What does point A
represent?
• What does point X
represent?
Let’s look at the graph further
• Point A- underutilization of
resources/ underemployment
• Point X- unattainable
• What assumptions do
we have to make
before we can make
such a graph?
Let’s look at the graph further
• Assumptions:
– Full employment
– Fixed resources- in
both quantity and
quality
– Fixed technology
– Two goods- often one
consumer good and
one capital good
How do we choose?
• In looking at a curve,
how do we know
where the optimal
level of production is?
How do we choose?
• Optimal allocation:
– Compare marginal
cost and marginal
benefit
– Making more butter
gives us a marginal
benefit, but when does
the marginal cost
exceed that benefit
– MB=MC is desirable
Changing the curve
• How do we get a
change in the
Production
Possibilities Curve?
Changing the curve
• Here’s how:
– Unemployment
– Increases in resources and
supplies (quantity or
quality- e.g. oil)
– New technology (same
resources, just utilized
better)
• Static economies must
choose between two
goods
• Growing economies can
do both!
Changing the curve
• In the product
possibility curve,
output 1 is usually
consumer goods,
output 2 is capital
goods
• Focusing on which
will lead to greater
long term gains?
Homework
• Pages 5-8 in the workbook- we will
discuss tomorrow