Transcript Unit 1 - cloudfront.net

•Scarcity, opportunity cost, choices
•Production Possibilities Curve
•Comparative/Absolute Advantage
•Supply and Demand
•Macro Issues
Economics defined:
• Study of choice
• How society deals with the problem of scarcity
• How scarce resources are used in the production,
distribution and consumption of goods/services
to maximize the satisfaction of human wants
• Economic interaction- how individuals choices
affect others
3
TEN PRINCIPLES OF
ECONOMICS
Principle #1: A country’s standard of living
depends on its ability to produce goods &
services.
• The most important determinant of living
standards: productivity, the amount of goods and
services produced per unit of labor.
• Productivity depends on the equipment, skills, and
technology available to workers.
• Other factors (e.g., labor unions, competition from
abroad) have far less impact on living standards.
Economic Growth [Increase in Real GDP or per capita GDP]
3% annual growth will increase our standard of living.
1929-Per capita=$792; 1933-Per capita=$430; 2010-per capita= $48,000
4
TEN PRINCIPLES OF
ECONOMICS
Principle #1: A country’s standard of living
depends on its ability to produce goods &
services.
• Huge variation in living standards across
countries and over time:
▫ Average income in rich countries is more than
ten times average income in poor countries.
▫ The U.S. standard of living today is about
eight times larger than 100 years ago.
5
TEN PRINCIPLES OF
ECONOMICS
Principle #2: Society faces a short-run
tradeoff between inflation and unemployment
• In the short-run (1 – 2 years),
many economic policies push inflation and
unemployment in opposite directions.
• Other factors can make this tradeoff more or less
favorable, but the tradeoff is always present.
• Full Employment – about 95-96%
employment is full employment. In
1982, unemployment was 10.8% [12 M
unempl.]
3. Economic Efficiency – “obtaining
the maximum output from available
resources” or “maximum benefits at
minimum cost from our limited
resources.”
“Doing the best with what we have.”
Reasonable inflation, 1-2% is OK.
4. Price Level Stability – sizable inflation or deflation
should be avoided. We had over 10% in 73, 79, & 80. Inflation
was 2% in the 1950s, 2.3% in 1960s and 7.4% in 80s.
A person making $25,000 a year at age 30 would need (with
average inflation of 5%) $125,000 a year at age 65 to have
the same standard of living.
.
1972 --------82;
1982-------2010
It took $2.31 in 1982 to buy what $1 bought in 1972.
In 2009, it took $2.23 to buy what $1 bought in 1982.
In 1945, $1.50 bought what $1.00 did in 1860.
Today, it takes $11 to buy what $1 bought in 1945.
8
TEN PRINCIPLES OF
ECONOMICS
Principle #4: Prices rise when the
government prints too much money.
• Inflation: increases in the general level of prices.
• In the long run, inflation is almost always caused by
excessive growth in the quantity of money, which
causes the value of money to fall.
• The faster the govt creates money,
the greater the inflation rate.
5. An Equitable Distribution of Income.
One group shouldn’t
have extreme luxury while another is in stark poverty.
• You are free to make your own
economic decisions:
– Choose your job
– Choose where and when you work
– Work for yourself or someone else
– Leave your job and to move to another job
– Free to buy what we want
• Businesses are free to:
– Choose which workers they want
– Figure out how much business they want to do
– Businesses are free to sell what they want
11
TEN PRINCIPLES OF
ECONOMICS
Principle #6: Rational People Think at the
Margin
Rational people
▫ systematically and purposefully do the best they can to
achieve their objectives.
▫ make decisions by evaluating costs and benefits of
marginal changes – incremental adjustments to an
existing plan.
12
TEN PRINCIPLES OF
ECONOMICS
Principle #6: Rational People Think at the
Margin
Examples:
• When a student considers whether to go to
college for an additional year, he compares the
fees & foregone wages to the extra income
he could earn with the extra year of education.
• When a manager considers whether to increase
output, she compares the cost of the needed
labor and materials to the extra revenue.
7. Economic Security – provision should be made for those
not able to take care of themselves – handicapped, disabled,
old age, chronically ill, orphans. Protection from lay-offs
[unemployment insurance]. Also no discrimination.
43 million Americans have some type of disability.
A. Hearing impaired: 22 million (including 2 million deaf)
B. Totally blind: 120,000 (Legally blind: 60,000)
C. Epileptic: 2 million
D. Paralyzed: 1.2 million
E. Developmentally disabled; 9.2 million
F. Speech impaired: 2.1 million
G. Mentally retarded: up to 2.5 million
H. HIV infected: 900,000
.
8.
Balance of Trade. Over $400 billion a year the last
few years. Some of these goals are complementary [economic growth
& F.E.] and some conflict [F.E. and price level stability].
14
TEN PRINCIPLES OF
ECONOMICS
Trade Can Make Everyone Better Off
• Rather than being self-sufficient,
people can specialize in producing one good or
service and exchange it for other goods.
• Countries also benefit from trade & specialization:
▫ Get a better price abroad for goods they produce
▫ Buy other goods more cheaply from abroad than
could be produced at home
“The first lesson of economics is
scarcity: There is never enough of
anything to satisfy all those who
want it.
The first lesson of politics is to
disregard the first lesson of
economics”. --Thomas Sowell
Unlimited ____________ vs. Limited ____________
You cannot have everything you want. Therefore:
CHOICES must be made
What satisfies economic wants?
Are tangible items that satisfy our wants.
Such as: cars, TVs, computers, clothes, etc.
Are goods for immediate
consumption that satisfy our
wants directly.
Examples?
Are goods that satisfy our wants
indirectly; goods used to produce
other goods. Examples?
What else satisfies our wants?
Intangible items such as:
Legal advice/representation
Medical and dental work
Tax preparation
Painting and repair work
House cleaning
Resources a.k.a. The Factors of Production
Economists classify resources into 4 categories
1. Land
 Natural resources, acreage, ports, oil, minerals,
rivers
- coal, oil, water, fossil fuels, etc.
- vegetation and water
– sun, wind, and rain
 The payment for Land is RENT
2. Labor
 Human resources (physical and intellectual)
 The payment for Labor is WAGES
3. Capital (a product of Investment)
• All manufactured goods & services used in
producing consumer goods. Examples: Tools,
machinery, equipment, trucks to carry goods,
airplanes, etc.
• Real (can produce something directly) and
financial (money, stocks, bonds)
• The payment for Capital is INTEREST
4. Entrepreneurship
• The special ability of risk-takers to combine land
labor and capital in new ways in order to make
profit
• Someone who takes the initiative in using or
combining land, labor & capital to produce a
good or service.
• Someone who is innovative, a risk taker, and
makes basic business decisions.
• The payment for Entrepreneurship is PROFIT
Distinguishing:
• The study of the economy as a whole –
national trends related to income, output and
the price level.
• The study of the individual economic units or
parts of the economy – pricing and output
decisions in a particular industry or part of
the economy.
Distinguishing Positive and
Normative Analysis/Statements
• What is?
• What was?
• What will be?
• What should be?
• What ought to be?
How are these questions different?
Type of analysis?
Type of statement?
Speaking as?
Three Basic Economic Systems:
both
both
both
Government
Supply and
Demand
Government
Supply and
Demand
Government
Supply and
Demand
Scarcity is the problem of using _?_
resources to fulfill people’s _?_ wants.
A.
B.
C.
D.
E.
limited; unlimited
unlimited; unlimited
unlimited; limited
limited; limited
None of the above
• Once a resource or factor of production has been put
to productive use an opportunity cost is incurred. (if
you choose one, you give up another)
• Opportunity cost is the next best alternative use for a
resource.
▫ Ex. If the 3 cups of flour are used to bake bread, then the
opportunity cost is the cake that could also have been
baked with the 3 cups of flour.
• No matter what we do with our time or resources, we
always incur opportunity cost. (price and everything
else that must be given up)
When a small amount of the
good is produced, opp. cost is
low because society needs to
use only those resources that
are especially suited for its
production
Assume that Matt and Kyle each have a yard to
rake/bag leaves and a 10 page term paper to type.
If it takes Matt 2 hours to rake/bag a lawn and 4
hours to type a paper and it takes Kyle 4 hours to
rake/bag a lawn and 2 hours to type a paper, how
long would it take each guy to complete both
tasks?
6 hours
Is there a more efficient way to
accomplish both tasks?
Explain why?
Yes. Matt rakes/bags both lawns and Kyle types both papers. It
would take each one 4 hours.
ACTIVE LEARNING 1
Applying the principles
You are selling your 1996 Mustang. You have
already spent $1000 on repairs.
At the last minute, the transmission dies. You can
pay $600 to have it repaired, or sell the car “as is.”
In each of the following scenarios, should you have
the transmission repaired? Explain.
A. Blue book value is $6500 if transmission works,
$5700 if it doesn’t
B. Blue book value is $6000 if transmission works,
$5500 if it doesn’t
30
ACTIVE LEARNING 1
Answers
Cost of fixing transmission = $600
A. Blue book value is $6500 if transmission works,
$5700 if it doesn’t
Benefit of fixing the transmission = $800
($6500 – 5700).
It’s worthwhile to have the transmission fixed.
B. Blue book value is $6000 if transmission works,
$5500 if it doesn’t
Benefit of fixing the transmission is only $500.
Paying $600 to fix transmission is not
worthwhile.
31
Production Possibilities Curves
Notes
A
3
G
U
N
S
E
B
2
F
1
0
C
D
1
BUTTER
2
3
Full and Efficient Production
• Productive Efficiency: getting the most
produced from your scarce resource
• Allocative efficiency: getting the most of
what people want from the scarce resources
(allocating resources to the goods and
services people want)
• How are these different?
Marginal Analysis
• Marginal benefit – the benefit derived from producing an
additional unit(s) of product
• Marginal cost – the cost derived from producing an additional
unit(s) of product
• Produce as long as MB = MC to maximize satisfaction of wants.
•
If MC >MB, production has exceeded society’s desire for the
good (allocative inefficiency – overallocation of resources)
•
If MC < MB, underallocation of resources exists.
What is a production possibilities
curves (PPC)?
• A diagram that shows all the possible
combinations of 2 goods and services that a
country/society/economy can produce.
• Illustrates the concept of opportunity cost and
tradeoffs
Assumptions of a PPC
• Only two products can be produced
• All resources are fixed
▫ Resources are land, labor, capital and
entrepreneurship
• All technology is fixed
• All resources are used fully and efficiently
• Ceteris paribus
▫ all else remains equal
Points of the PPC
• On the curve▫ means full and efficient use of resources
▫ we are using everything we have and not wasting
anything
•Under the curve–Inefficient use of resources- called unemployment of resources
–We are wasting resources- there can be unemployment of any resource
not just labor.
•Above the curve–Not possible given the resources available
–The only way to reach the point above the curve is to shift the curve
outward to reach the point
–↑ technology, ↑ LLCE
Points of the
PPC
A
E
3
G
U
N
S
B
2
F
1
0
C
D
1
BUTTER
2
3
The Production Possibilities Frontier
Quantity of
Computers
Produced
D
3,000
C
2,200
2,000
1,000
0
A
B
300
600 700
1,000
Quantity of
Cars Produced
Quantity
of Computers
Produced
The Production
Possibilities Frontier
4,000
An outward shift
in the production
possibilities
frontier
3,000
2,100
2,000
0
E
A
700 750
1,000
Quantity of
Cars Produced
Increase and Decrease
• The PPC can shift to
the right or left.
• Shift right when we
discover new resources
or technology
▫ This will move the curve
closer to point E
• Shift left when
resources are destroyed
or technology
decreases
A
3
G
U
N
S
E
B
2
F
1
0
1
2
BUTTER
C
3
Cost…
• What kind of cost
does the PPC have?
• If we move from
point D to point C
what is the
opportunity cost?
• If we move from
point C to point B?
• If we move from
point B to point A?
3
A
E
B
2
G
U 1
N
S
C
F
0
D
1
BUTTER
2
3
Cost…
Hamburgers
$5
• What would a
PPC look like
if it had
constant cost?
A
4
B
G
3
C
H
2
D
1
E
We call this a budget line.
F
1
2
3
4
$5
Hotdogs
Which is better?
• Which is better to have a point below the
curve or to shift to the left?
• When there is a point below the curve, the
resources are still available, but not being
used.
• When we shift to the left (below) the PPC, the
resources have been destroyed.
• If you are below the curve you lost your job,
when you shift to the left you have died.
Which is better?
1. An economy that is fully employing all its productive
resources but allocating less to investment than
to consumption will be at which of the following
positions on the PPC to the right?
a. A
b. B
c. C
d. D
e. E
2. Which of the following best explains the shape of the
PPC for the two-commodity economy shown above?
a. Opportunity cost of producing another unit of each stays the same.
b. Opportunity cost of producing another unit of each decreases.
c. Opportunity cost of producing another unit of each increases.
3. Which of the following is true of the PPC on the right?
a. Point Q is attainable but undesirable.
b. Point R is unattainable but undesirable.
c. A technological improvement of watches would move
the economy from T to P.
d. There is unemployment at point T because workers
e. The opportunity cost of moving from S to T is the # of
watches given up.
4. If we move from B to C on the graph (right),
the opportunity cost is?
a. AH units of good Y
b. OG units of good Y
c. EF units of good X
d. HG units of good Y
A
H
G
O
B
C
b. Rehiring laid-off workers
c. Using machinery for missile production
instead of steel production
d. Using machinery for steel production
instead of missile production
e. Developing a more efficient steelmaking process
6. Base on the graph (right), which statements
are true?
I. The opportunity cost of moving from P to R
is 10 units of Y.
II. The opportunity cost of moving from R to P
is 8 units of X.
III. The opportunity cost of moving from Q to R
is 0 units.
a. I only b. III only c. I & II only d. I, II, & III
Missiles
5. Which of the following would cause the
PPC shown (right) to shift outward?
a. Reopening steel plants that had been closed
Steel
X
Capital Goods
A
E
B
D
More or better resources or better technology
C
Consumption Goods
41. At what letter is there unemployment [recession]? D
42. What letters represent resources being used in their
most productive manner? [full employment,
full production, and best available technology] A, B, or C
43. What letter represents an improvement in technology,
therefore a new PPC frontier line? E
44. The (straight line/curve) illustrates the “law of increasing cost”?
45. The (straight line/curve) illustrates the “law of constant cost.”
46. At what letter would there be the most economic growth in the
future if a country were producing there now? A
What is the opportunity cost when moving from “C” to “B”; Consumption
when moving from A to C; Capital
and do we have to give anything up when moving from D to B? no
Absolute Advantage [Outputs v. Inputs]
Remember that with outputs or quantity, the larger number
indicates absolute advantage; that country can produce
absolutely more with the same inputs, and is more efficient.
Product
Market
And with inputs (hours), the smaller number indicates absolute
advantage; that country is more efficient because it can produce
a good absolutely faster than the other with the same inputs.
Resource
Market
Assume that nation X can produce either 40
notepads or 80 pens; nation Y can produce
either 10 notepads or 40 pens. Absolute
Advantage?
NP
Pens
X
40
80
Y
10
40
Assume that nation X can produce either 40
notepads or 80 pens; nation Y can produce
either 10 notepads or 40 pens.
NP
Pens
X
40 1 (2)
80 2 (1/2)
Y
10 1 (4)
40 4 (1/4)
• Which statement is true?
• The OC of producing 1 NP in
X is 2 pens.
• The OC of producing 1 Pen in
Y is 1/4 NP.
• All of the above.
Most economists would agree that specialization
and trade is more efficient than self
sufficiency even when one country has an
absolute advantage in the production of both
products.
To efficiently utilize resources and make gains
from trade, nations should specialize in the
products for which they have a comparative
advantage or the least comparative
disadvantage.
With comparative advantage, a nation receives a
higher relative price for the goods it exports,
and
pays a lower relative price for the goods it imports.
Assumptions:
• 8 hour work day (all work done)
• the services of a lawyer and a secretary
cannot be done simultaneously
Suppose that a lawyer makes $100 per hour and
types twice as fast as her secretary. The secretary
makes $10 per hour. Ceteris paribus, should the
lawyer fire the secretary and do the typing
(secretarial work) herself?
Even though the lawyer has an absolute advantage in both
tasks, she should NOT fire the secretary. If the lawyer spent
half of her day typing, she would give up $400. If she pays a
secretary to type, the lawyer only gives up $80.
Coffee
Coffee
30
20
12
8
18
30
Wheat
4
10
Wheat
Absolute Advantage? Should the U.S. and
Brazil specialize and trade?
Step 1:
Set up the problem
Step 2: Identify Production Maximums
Coffee
Wheat
U.S.
30
1
(1W)
30
1
(1C)
Brazil
20
2
(1/2 W)
10
1
(2C)
Step 3:
Reduce Ratios
Step 4: Identify Opportunity Cost
Step 5: Compare Costs --- lowest has CA
Coffee:
Brazil
Wheat:
U.S.
Coffee
Coffee
30
20
12
8
18
30
Wheat
4
10
Wheat
Absolute Advantage? Should the U.S. and
Brazil specialize and trade?
Coffee
U.S.
Brazil
Wheat
12
18
8
4
20
22
20
30
+8
Step 1:
Step 2:
Step 3:
Step 4:
Set up the problem
Identify production prior to specialization
Total production in each product prior to specialization
Identify maximum possible production of each product
with specialization according to comparative advantage
Step 5: Compare output before/after specialization and trade
Before
After
Gain
U.S.
Brazil
1C
=
1.5C =
2C
=
1W
1W
1W
Step 1: Identify original reduced ratios for each country
Step 2: Make one of the two products both equal 1
Step 3: Terms of trade fall between the product that does
not equal 1
Possible
Term of
Trade
Distinguishing input from output problems.
• An OUTPUT problem presents the data as
products produced given a set of resources.
(ex. Number of pens produced)
• An INPUT problem presents the data as
amount of resources needed to produce a
fixed amount of output. (ex. Number of labor
hours to produce 1 bushel)
• Input problems change the scenario from
who can produce the most to who can
produce a given output with the least amount
of resources.
Which type of problem?
• Acres to produce one unit of each.
Apples
Pears
Tom
10
5
Sam
6
2
• Input problem
• Output problem
Absolute Advantage?
• Acres to produce one unit of each.
Apples
Pears
Tom
10
5
Sam
6
2
• Absolute advantage in apples and pears?
• Tom
• Sam
Which type of problem?
• Number caught per day.
Trout
Bass
Tom
4
6
Sam
24
12
• Input problem
• Output problem
Absolute Advantage?
• Number caught per day.
Trout
Bass
Tom
4
6
Sam
24
12
• Which guy has the absolute advantage in the
production of each product?
• Tom
Sam
Which type of problem?
• Days to produce one unit of each.
Cars
Planes
XYZ Corp.
8
10
QKFX Corp.
15
12
• Input problem
• Output problem
Absolute Disadvantage?
• Days to produce one unit of each.
Cars
Planes
XYZ Corp.
8
10
QKFX Corp.
15
12
• Which corporation has an absolute disadvantage
in the production of both products?
• XYZ
QKFX
Which type of problem?
• To produce the following from one ton of
olives.
Canned Olives
Olive Oil
Zaire
60
10
Colombia
24
8
• Input problem
• Output problem
Absolute Advantage?
• To produce the following from one ton of
olives.
Canned Olives
Olive Oil
Zaire
60
10
Colombia
24
8
• Which nation has the absolute advantage in
both products?
• Zaire
Colombia
Calculating comparative advantage in
an INPUT problem?
• Acres to produce one unit of each.
Apples
Pears
Tom
10
5
Sam
6
2
• This procedure requires an extra step after
determining the problem is an input problem:
convert the problem to an output problem
and solve for comparative advantage.
Calculating comparative advantage in
an INPUT problem:
• Acres to produce one unit of each.
Apples
Pears
Apples
Pears
Tom
10 2
5
1
Tom
3 1 (2)
6 2 (1/2)
Sam
6 3
2
1
Sam
5 1 (3)
15 3(1/3)
• To convert, look for the lowest common
denominator (i.e., 30 for 10, 5, 6 and 2). Assume
you have 30 acres and convert the numbers to output
produced in 30 acres. See chart on right for
conversion. Then solve problem as an output
problem.
Shortcut Method for Input Problems:
• Acres to produce one unit of each.
Apples Pears
Apples
Pears
Tom 10
5
Tom
5
10
Sam
2
Sam
2
6
6
• Shortcut procedure: swap data per product per
country. Reduce ratio and solve as output problem.
See next screen for example.
Comparative Advantage?
• Days to produce one unit of each.
XYZ Corp.
Cars
Planes
8
10
QKFX Corp.
15
12
• Work this problem on your own paper to
determine which corporation should specialize in
cars and which in planes.
• Click the mouse upon completion of your work.
Comparative Advantage?
• Days to produce one unit of each.
Unconverted:
Cars
Planes
XYZ Corp.
8
10
QKFX Corp.
15
12
Cars
Planes
Converted:
XYZ Corp.
10
5
(4/5)
8
4 (5/4)
QKFX Corp.
12
4
(5/4)
15
5 (4/5)
Comparative Advantage?
Converted:
Cars
Planes
XYZ Corp.
10 5 (4/5)
8 4 (5/4)
QKFX Corp.
12 4 (5/4)
15 5 (4/5)
• Click the true statement based on the data:
• XYZ has an absolute disadvantage in cars and a comparative
advantage in planes
• XYZ has an absolute disadvantage in cars and planes but a
comparative advantage in cars.
• QKFX has an absolute advantage in cars and planes but a
comparative advantage in cars.