Transcript Economics 211 Principles of Microeconomics Dr. Greg Delemeester

Economics 211
Principles of Microeconomics
Dr. Greg Delemeester
Economics
Making choices under conditions of
scarcity
 How many hours should I study for
biology?
 What stocks should I buy for my
portfolio?
 How many cars should I steal?
 How many job interviews should I go
on?
 What Do Schoolteachers and
Sumo Wrestlers Have in
Common?
 How Is the Ku Klux Klan Like
a Group of Real-Estate
Agents?
 Why Do Drug Dealers Still Live
with Their Moms?
 Where Have All the Criminals
Gone?
 What Makes a Perfect Parent?
 Would a Roshanda by Any
Other Name Smell as Sweet?
 Increasing Residual Wage
Inequality: Composition Effects,
Noisy Data, or Rising Demand
for Skill?
 Medium-Term Business Cycles
 Can Information Heterogeneity
Explain the Exchange Rate
Determination Puzzle?
 Media Frenzies in Markets for
Financial Information
 An Efficient Dynamic Auction for
Heterogeneous Commodities
 Paying Not to Go to the Gym
Economic Fundamentals
 Self Interest
 Rationality
 Maximizing behavior
 Responding to incentives
Best Undergrad College Degrees by Salary
Major
Starting Median Salary
Mid-Career Median Salary
Chemical Engineering
$65,700
$107,000
Economics
$50,200
$101,000
Physics
$51,100
$98,800
Math
$47,000
$93,600
Physician Assistant
$74,300
$91,700
Finance
$48,500
$89,400
MIS
$51,900
$87,200
Chemistry
$42,900
$82,300
Marketing
$41,500
$81,500
Accounting
$46,500
$77,600
Political Science
$41,300
$77,300
Management
$42,900
$73,000
History
$38,800
$70,000
English
$37,800
$66,900
Journalism
$36,300
$65,300
Psychology
$36,000
$61,000
Source: www.payscale.com
Mini Experiment
 “There are no $5 bills laying on the ground.”
 Incentives Matter!
Economic Fundamentals
 Self Interest
 Rationality
 Maximizing behavior
 Responding to incentives
 TANSTAAFL
 Scarcity  Choices  Opportunity costs
There
Ain’t
No
Such
Thing
As
A
Free
Lunch
Economic Fundamentals
 Self Interest
 Rationality
 Maximizing behavior
 Responding to incentives
 TANSTAAFL
 Scarcity  Opportunity costs
 Marginal Analysis
 Behavior is modeled as if decisions were based on costs
and benefits at the margin
William installs custom sound systems in cars. If he installs 7
per day, his total costs are $300. If he installs 8 per day, his
total costs are $400. William will install only 8 sound systems
per day if the 8th customer is willing to pay at least:
1.
2.
3.
4.
$50
$100
$300
$400
0% 0% 0% 0%
a)
1
2
3
4
5
b)
c)
d)
Space Mountain
(Problem Set 1, #9)
You have waited 30 minutes
in a line for the Space
Mountain ride at Disneyworld.
You see a sign that says,
"From this point on your wait
is 45 minutes." You must
decide whether to continue in
line or to move elsewhere.
On what basis do you make
the decision?
Do the 30 minutes you've
already stood in line come
into play?
Marginal Analysis ignores sunk costs!
Economic Fundamentals
Unintended Consequences
 CAFE standards
27.5 MPG fleet average
Objective: Save energy + clean environment
 Lighter + smaller cars = more dangerous cars ?
 National Academy of Sciences: 1300 to 2600 extra
highway deaths each year
Modes of Analysis
 Positive Analysis
 Normative Analysis
Results of Survey
Average
1. What is the current federal hourly minimum wage rate?
2. What is the average hourly wage rate in the United States?
3. If the price of gasoline rises by 10%, by how much would
your gasoline purchases change?
4. Should the minimum wage rate be raised to $10 per hour?
5. Should marijuana be legalized?
6. Should the US adopt a single-payer national health
system?
7. All government barriers to free international trade should
be ended.
8. Solve the following equation for x:
3x + 40 = 80 - 5x
Actual
Economic Model of Crime
 Decision Rule
 If MB > MC  steal another car
 Assumptions





Resale value on car = $40,000
Income = $20,000
Jail term = 5 years
Probability of Arrest = 20%
Probability of Conviction = 90%
MB = $40,000
MC = (5)($20,000)(.20)(.90) = $18,000
Steal the car!
Economic Model of Crime
 Policy Implications [How to deter crime?]




Increase
Increase
Increase
Increase
jail sentence
probability of arrest
probability of conviction
income
Which of the following will cause property
crime to increase?
An increase in jail terms.
A decrease in personal
incomes.
An increase in the probability
of arrest.
A decrease in the expected
benefit.
4
5
n
A
in
...
in
se
cr
ea
de
ea
s
se
cr
ea
e
in
...
in
e
3
de
ea
s
2
A
in
cr
n
A
1
...
0% 0% 0% 0%
...
d)
A
c)
in
cr
a)
b)
Gun-Related Murders (Thousands)
16.0
1980
14.0
1975
12.0
10.0
1970
8.0
1965
6.0
4.0
2.0
0.0
0.0
0.5
1.0
1.5
2.0
Guns Sold (Millions)
2.5
3.0
Applications
(#3, Problem Set 1)
A few years ago, Tina ranked three
available options as follows:
 1st Choice: pay $21,000 tuition and finish a
Master's degree in fine arts at the Ohio State
University.
 2nd Choice: earn $19,000 working part-time
managing a small local theater and spend her
spare time pursuing her theater hobby as a
volunteer director of small-theater plays.
 3rd Choice: earn $44,000 working full-time
reviewing yellow page advertisements for
Verizon.
What is the minimum value of Tina’s opportunity
cost for pursuing her first choice?
a)
b)
c)
d)
$19,000
$21,000
$65,000
$84,000
1st Choice: pay $21,000 tuition and
finish a Master's degree in fine arts at
the Ohio State University.
2nd Choice: earn $19,000 working parttime managing a small local theater and
spend her spare time pursuing her
theater hobby as a volunteer director of
small-theater plays.
3rd Choice: earn $44,000 working fulltime reviewing yellow page
advertisements for Verizon.
1
2
3
4
5
0%
19000
0%
0%
0%
21000
65000
84000
The acres of grass surrounding the Taj Mahal in
Agra, India, are often cut by young women who
slice off handfuls with short kitchen blades. Is this
a low- or high-cost way to keep a lawn mowed?
(#4, Problem Set 1)
Maximizing the Net Benefits from Pizza
TB
MB 
Q
TC
MC 
Q
Dollars
Total Benefit and Total Cost
50
45
40
35
30
25
20
15
10
5
0
TB
TC
0
1
2
3
4
5
6
7
Pizza
Rational Behavior:
Continue an activity until MB = MC
Marginal Benefit and Marginal Cost
$14
$12
Pizza
$10
$8
MC
$6
$4
MB
$2
$0
0
1
2
3
4
Dollars
5
6
7
Production Possibilities Frontier
 Shows tradeoffs facing an economy that
produces two goods
 Assumptions
 Resources are fixed
 Land
 Labor
 Capital
 Entrepreneurship
Cars
E
A
B
Unattainable
 Technology is fixed
D
C
Inefficient
Beer
Concave PPF implies “law of increasing opportunity cost”
Cars
Δ Beer
A
B
C
- Δ Cars
D
Slope of PPF = - Δ Cars / Δ Beer
(measures the Opportunity Cost)
Beer
PPF and Economic Growth
Economic Growth requires an expanding PPF
 Shifts in the PPF are due to:
 Change in resources
 Change in technology
Production Possibilities Frontier
Examples
 Cars v. Beer: more efficient brewing process
 Houses v. Computers: immigration
 Jazz v. Shrimp: Hurricane Katrina
 Food v. Electronics: China’s Cultural Revolution
Consider the PPF depicted below. A reduction in the amount
of unemployment could be described as the movement from:
A to B
B to D
D to C
B to E
120
100
Music CDs
a)
b)
c)
d)
E
A
80
B
60
D
C
40
20
0
0
2
4
6
8
10
12
Books
0%
A
1
2
3
4
5
to
B
B
to
0%
D
D
to
0%
C
B
0%
to
E
Consider the PPF depicted below. A reduction in the amount
of unemployment could be described as the movement from:
A to B
B to D
D to C
B to E
120
100
Music CDs
a)
b)
c)
d)
E
A
80
B
60
D
C
40
20
0
0
2
4
6
8
10
12
Books
0%
A
1
2
3
4
5
to
B
B
to
0%
D
D
to
0%
C
B
0%
to
E
Choices, choices, choices…
 All societies must answer basic questions:
 What will be produced?
 How will it be produced?
 For whom will it be produced?
 Allocation Mechanisms
 Tradition
 Plan
 Market
Alternative Definitions*
*The following material will not be on the first exam.
Gains From Trade
 Trade implies mutually beneficial exchanges
 Not a zero-sum game!
 Comparative Advantage
 David Ricardo
 Lowest opportunity cost producer
 Specialization and trade can allow individuals (and
countries) to expand their consumption beyond their PPF
constraints
Pizza
Pizza
slope = ∆P/ ∆ C = -300/25 = - 12/1
∆C = 25
slope = ∆P/ ∆ C = -200/50 = - 4/1
600
∆P = -300
400
∆C = 50
∆P = -200
300
200
50
100
Country A
Opportunity cost of 1 Car is 4 Pizzas
Cars
25
50
Country B
Opportunity cost of 1 Car is 12 Pizzas
Country A has the comparative advantage in producing cars.
Cars
Pizza
Pizza
Country B
Country A
600
400
300
200
50
100
Cars
No Trade
Pizza
Production
Cars
25
With Trade
Pizza
Cars
A
200
50
0
100
B
300
25
600
0
500
75
600
100
World
50
Cars
Questions from the Problem Set
No Trade
Computers
50
45
Computers
Wine
20
21
10
11
12
14
Belgium
15
16
2
3
25
0
37
14
40
Computers
Wine
Germany
World
35
With Trade
35
12
Germany trades 3W for 9C
30
25
20
ΔC = 9
15
10
ΔW = - 3
5
Germany
Belgium
0
0
5
Belgium: 1W : 5C
Belgium: 1C : 1/5W
10
15
Wine
20
Germany: 1W : 2C
Germany: 1C : 1/2W
25