15 fundamental concepts
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Transcript 15 fundamental concepts
15 FUNDAMENTAL
CONCEPTS
BEGINNING WITH THE END IN
MIND
SCARCITY
SCARCITY OF RESOURCES
LAND
SCARCITY
LABOR
SCARCITY
CAPITAL
SCARCITY
THE ECONOMIC PROBLEM
LIMITED RESOURCES VS. UNLIMITED
WANTS AND NEEDS
SCARCITY NECESSITATES CHOICE
OR
TRADEOFFS/OPPORTUNITY
COSTS
ALL CHOICES INVOLVE TRADEOFFS
– YOU MUST CHOOSE A OR B
“THERE IS NO SUCH THING AS A FREE
LUNCH”
SLEEP OR SCHOOL? WORK OR FRIENDS?
OR
A DOLLAR SPENT ON VACTION IS A
DOLLAR NOT SPENT ON RETIREMENT
TRADEOFFS/OPPORTUNITY
COSTS
GUNS VS. BUTTER
OR
CLEAN ENVIRONMENT VS. HIGHER
INCOMES
OR
TRADEOFFS/OPPORTUNITY
COSTS
EFFICIENCY VS.
EQUITY
GETTING THE MOST OUT OF
SCARCE RESOURCES VS.
FAIRNESS OF DISTRIBUTION
TRADEOFFS/OPPORTUNITY
COSTS
REDISTRIBUTION OF INCOME
THROUGH UNEMPLOYMENT AND
WELFARE REDUCES INCENTIVE TO
WORK HARD
MORE EQUAL SLICES BUT SMALLER
PIE
TRADEOFFS/OPPORTUNITY
COSTS
ALL TRADEOFFS INVOLVE
OPPORTUNITY COSTS
– THE COST OF THE NEXT BEST
ALTERNATIVE USE OF TIME, MONEY OR
RESOURCES
SLEEPING IN SATURDAY MORNING
COSTS $35?!?!?!?!?
TRADEOFFS/OPPORTUNITY
COSTS
EXPLICIT + IMPLICIT COSTS
TRUE COST OF COLLEGE??
– EXPLICIT=TUITION AND BOOKS
– IMPLICIT=LOST WAGES ($10/HOUR =
~$20,000/YEAR
SHOULD TOP ATHLETES STAY IN
COLLEGE?
RATIONAL PEOPLE THINK
AT THE MARGIN
MUST WEIGH ADDITIONAL COSTS
WITH ADDITIONAL BENEFIT
MARGINAL COST IS THE ADDITIONAL
COST OF AN ADDITIONAL UNIT
MARGINAL BENEFIT IS THE
ADDITIONAL BENEFIT FROM AN
ADDITIONAL UNIT
RATIONAL PEOPLE THINK
AT THE MARGIN
NEVER LET YOUR MARGINAL COSTS
EXCEED YOUR MARGINAL BENEFITS
MC=MR
PROFIT MAXIMIZATION
SHOULD THE AIRLINE SELL THE $500
TICKET FOR $100 TEN MINUTES
BEFORE TAKEOFF???
PEOPLE RESPOND TO
INCENTIVES
DECISIONS MADE TO GAIN BENEFIT
OR PROFIT AND TO AVOID LOSS OR
PAIN
KNOWING PEOPLE RESPOND
PREDICTALBLY TO INCENTIVES
SHOULD BE KEPT IN MIND WHEN
SETTING PUBLIC POLICY
PEOPLE RESPOND TO
INCENTIVES
SUV TAX BREAK
TAXES, UNEMPLOYMENT BENEFITS
SOCIAL SECURITY
LATE SLIPS
RELATIVE SCARCITY
DEMAND FOR A GOOD OR SERVICE
IN RELATION TO THE SUPPLY OF
THAT GOOD
1000 < 10
BALLPLAYERS VS. TEACHERS
RELATIVELY SCARCE GOODS = $$$$$
VOLUNTARY EXCHANGE
BOTH PARTIES EXPECT TO BE
BETTER OFF AFTER THE EXCHANGE
WIN/WIN SITUATION
COMPETITION BETWEEN
BUYERS/SELLERS
NET GAIN IS POSITIVE FOR BOTH
PARTIES
SPECIALIZATION LEADS TO
INTERDEPENDENCE
SPECIALIZATION: CONCENTRATION
OF PRODUCTIVE EFFORTS…LEADS
TO GREATER EFFICIENCY
BASED ON COMPARATIVE
ADVANTAGE…WHO HAS THE
LOWEST OPPORTUNITY COST?
FORCES RELIANCE ON OTHERS TO
LIVE
PRICE=SUPPLY + DEMAND
SUPPLY
SUPPLY
PRICE
PRICE
PRICE
PRICE
DEMAND
DEMAND
PRICE=SUPPLY + DEMAND
SUPPLY
DEMAND
PRICE
SUPPLY
DEMAND
PRICE
DEMAND
SUPPLY
PRICE
DEMAND
SUPPLY
PRICE
PRICE=SUPPLY + DEMAND
HIGH DEMAND
AND LOW
SUPPLY=HIGH
PRICES
PRICE=SUPPLY + DEMAND
MARKET SYSTEM DEPENDS ON
PRICES AND SELF-INTEREST TO
GUIDE RESOURCES
PRICES=SUPPLY+DEMAND
HOUSEHOLDS (DEMAND) AND FIRMS
(SUPPLY) INTERACT
ADAM SMITH…INVISIBLE HAND,
LAISSEZ FAIRE
ADAM SMITH
“…IT IS NOT THE
BENEVOLENCE OF
THE BUTCHER,
THE BREWER, OR
THE BAKER THAT
WE EXPECT OUR
DINNER, BUT
FROM THEIR
REGARD TO THEIR
OWN INTEREST…”
PRICE = SUPPLY+ DEMAND
COMMAND ECONOMY…DECISIONS
MADE BY GOVERNMENT
CENTRALLY PLANNED
– WHAT IS PRODUCED?
– HOW MUCH IS PRODUCED?
– FOR WHOM? WHO SHOULD PRODUCE?
PRICE = SUPPLY+ DEMAND
COMMAND ECONOMIES
– DO NOT MAXIMIZE SOCIAL WELFARE IF
RESOURCES ARE NOT GUIDED
EFFICIENTLY
COMMAND ECONOMIES MAY
PROVIDE FOR RAPID SHIFTS IN
ECONOMIC ACTIVITY BUT PERFORM
POORLY IN THE LONG RUN
COMPETITION DRIVES
EFFICIENCY
EFFICIENCY
– ALLOCATIVE OR ECONOMIC
GETTING WHAT THE ECONOMY WANTS
– TECHNICAL
PRODUCING THE MOST WITH THE FEWEST
AMOUNT OF RESOURCES
COMPETITION INCREASES BOTH
LEVELS OF EFFICIENCY
COMPETITION DRIVES
EFFICIENCY
SPORTS
ACADEMICS??? DRIVE BEHIND
VOUCHERS
WALMART VS KMART
MUSIC INDUSTRY
INTERNET ACCESS AND SERVICES
PUBLIC GOODS AND
MARKET FAILURES
PRIVATE GOODS
– EXCLUDABLE
– RIVAL
CLOTHING, FOOD, DVD PLAYERS…
PUBLIC GOODS
– NON-EXCLUDABLE
– NON-RIVAL
DEFENSE, ROADS, PUBLIC PARKS
Types of Goods
Rival?
Yes
Private Goods
Yes
Excludable?
No
Ice- cream cones
Clothing
Congested toll roads
No
Natural Monopolies
Fire protection
Cable TV
Uncongested toll
roads
Common Resources Public Goods
Fish in the ocean
The environment
Congested nontoll
roads
National defense
Knowledge
Uncongested nontoll
roads
PUBLIC GOODS AND
MARKET FAILURES
PRIVATE MARKETS HAVE NO
INCENTIVE TO PROVIDE FOR PUBLIC
GOODS…THIS NECESSITATES
GOVERNMENT INVOLVEMENT
COMMON POOL RESOURCES
– NON-EXCLUDABLE
– RIVAL (DEPLETABLE)
PUBLIC GOODS AND
MARKET FAILURES
EXTERNALITIES…ECONOMIC SIDE
EFFECT THE IMPOSES COSTS OR
BENEFITS ON SOMEONE OTHER
THAN THE PRODUCER AND THE
CONSUMER
EXTERNALITIES
NEGATIVE…POLUTION
POSITIVE…RESEARCH, EDUCATION
PUBLIC GOODS AND
MARKET FAILURES
MARKET POWER…THE ABILITY TO
UNDULY INFLUENCE MARKET
PRICES
LITTLE OR NO
COMPETITION…MONOPOLIES
MARKET AWARDS THOSE
ACCORDING TO ABILITY TO
PRODUCE
PRODUCTIVITY/STANDARD
OF LIVING
STANDARD OF LIVING: QUALTIY OF
LIFE MEASURED BY MATERIAL
POSSESIONS
PRODUCTIVITY: AMOUNT OF GOODS
AND SERVICES PRODUCED PER
HOUR
DIRECT RELATIONSHIP
PRODUCTIVITY/STANDARD
OF LIVING
UNITED STATES
$29,000
MEXICO
$8,000
NIGERIA
$900
STANDARD OF LIVING AND
PRODUCTIVITY
PRODUCTIVITY/STANDARD
OF LIVING
REMEMBER THE RULE OF 72!!!
ALL ABOUT PRODUCTIVITY
– INVESTMENT NEEDED
CAPTIAL
TECHNOLOGY
EDUCATION
HISTORICAL, PERSONAL OR
NATIONAL COMPARISONS
PRODUCTIVITY/STANDARD
OF LIVING
IMPACT OF GOVERNMENT DEFICIT
– DEFICIT: AMOUNT BY WHICH
EXPENDITURES EXCEED REVENUE
(YEAR TO YEAR)
– DEBT: CUMULATIVE EFFECT OF PAST
DEFICITS (OVER TIME)
DEBATE OVER IMPACT
PRODUCTIVITY/STANDARD
OF LIVING
GOVERNMENT
DEFICITS LEAD TO
CROWDING OUT
HIGHER INTEREST
RATES FOR ALL
LESS INVESTMENT
IN HUMAN AND
PHYSICAL
CAPITAL
CUTTING TAXES
WILL SPUR MORE
GROWTH…MORE
INCENTIVES
MORE GROWTH
MEANS MORE
REVENUE
GROW OUT OF THE
DEFICIT
PRODUCTIVITY/STANDARD
OF LIVING
IF DEFICITS DO “CROWD OUT”
– LOWER INVESTMENT TODAY MEANS
LOWER PRODUCTIVITY TOMORROW
DO DEFICITS LEAD TO LOWER
STANDARDS OF LIVING IN THE LONG
RUN???
UNEMPLOYMENT VS
INFLATION
TWO MAJOR PROBLEMS IN
MACROECONOMY
TRADEOFF IN THE SHORT RUN
PHILLIPS CURVE
I
U
UNEMPLOYMENT VS
INFLATION
PUBLIC POLICY
– FISCAL POLICY
TAX AND/OR SPEND
– MONETARY POLICY
CONTROL OF MONEY SUPPLY
LENDERS HURT BY
INFLATION
INFLATION…GENERAL RISE IN PRICE
LEVELS
VALUE OF DOLLAR DECREASES
IF UNEXPECTED WITH A FIXED
INTEREST RATE THEN LENDERS GET
PAID BACK IN CHEAPER DOLLARS
INTEREST RATES GUIDE
THE ECONOMY
INTEREST RATES…PRICE OF
BORROWING MONEY
SAVINGS RATE VS BORROWING RATE
FEDERAL RESERVE BOARD
CONTROLS MONEY SUPPLY
INTEREST RATES GUIDE
ECONOMY
MORE MONEY
LOWER RATES
MORE
BORROWING
MORE SPENDING
ECONOMY HEATS
UP
LESS MONEY
HIGHER RATES
LESS BORROWING
LESS SPENDING
ECONOMY SLOWS
DOWN
INVESTMENT IS NEEDED
FOR GROWTH
NO PAIN NO GAIN
INVESTMENT OF TIME MONEY OR
RESOURCES NEEDED FOR GROWTH
CAPITAL GOODS
TECHNOLOGY
HUMAN CAPITAL/EDUCATION
INVESTMENT IS NEEDED
FOR GROWTH
RULE OF 72
AMOUNT OF TIME IT TAKES FOR
“INVESTMENT” TO DOUBLE
72/7=10 YEARS TO DOUBLE
72/2=36 YEARS TO DOUBLE