Transcript What is Economics About Chapter 1

Chapter 1
What is
Economics About
Examples of Law of Increasing
Opportunity Costs
• Armed Services
– For the Civil War those with high amounts of
human capital (doctors, engineers…) were
given an exemption from the draft
– WWI, WWII and Korean War draft was
irrelevant of job or education level.
• Home Improvements
– Swedish men make more improvements
themselves compared to US men
Economic Growth
• Increase in resources
• Increase in technology
• Shift of PPF outward
How would each of the following
affect the US PPF?
• A rise in the unemployment rate
• The invention of the computer
• An increase in the number of births in the
United States
• An increase in the number of births in
Russia
Economic Growth within
a PPF Framework
Military Go o ds
Ec o nomic g ro wth s hifts
the PPF o utward.
PPF
2
PPF
1
0
Civilian Go o ds
Can we draw a PPF???
•
A Bloody Mary contains tomato juice and two shots
of vodka. A screwdriver contains orange juice and
one shot of vodka. Assume we have plenty of
orange juice and tomato juice, but only 1 small bottle
of vodka containing 6 shots.
1.
Draw a graph with Bloody Marys on X-axis and screwdrivers on the Yaxis. On your graph show all possible combinations of Bloody Marys and
screwdrivers that could be made, given a small bottle of vodka.
How many Bloody Marys could we make if we only made Bloody Marys?
How many Screwdrivers could we make if we only made Screwdrivers?
Can we make 6 of both drinks? Why or why not?
2.
3.
4.
Production Possibilities Frontier
for Grades
GRADE IN
S OCIOLOGY
HOURS S PENT
S TUDYING
ECONOMICS
GRADE IN
ECONOMICS
POINT IN
PART (b)
6
90
0
60
A
5
85
1
65
B
4
80
2
70
C
3
75
3
75
D
2
70
4
80
E
1
65
5
85
F
0
60
6
90
G
HOURS S PENT
S TUDYING
S OCIOLOGY
(a)
Production Possibilities Frontier for Grades
Grade in S o c io lo g y
90
A
Part (b)
(S o c . 90, Ec o n. 60)
B
85
(S o c . 85, Ec o n. 65)
H
C
80
Pro duc tio n
Po s s ibilitie s
Fro ntie r (PPF)
D
75
E
70
F
65
G
60
60
65
75
80
70
85
Grade in Ec o no mic s
90
More Hours of Study Shifts the
Production Possibilities Frontier
Grade in S o c io lo g y
95
90
85
80
77.5
75
D
X (S o c . 80, Ec o n. 75)
Y (S o c . 77.5, Ec o n. 77.5)
Z (S o c . 75, Ec o n. 80)
70
PPF1
(6 ho urs )
65
60
60 65
70
75 80 85 90
77.5
Grade in Ec o no mic s
PPF2
(7 ho urs )
95
Efficiency…Again
• Produce max amount possible given
resources and technology
• ON PPF – EFFICIENT
• UNDER PPF – INEFFICIENT
• OVER PPF – NOT POSSIBLE
Unemployment
• Economy is not producing the maximum
output given the resources and technology
available
• Efficient?
• On, over, or under PPF?
Efficiency Criterion
• Will alternate arrangements of resources
or goods make at least one person better
off without hurting someone else?
• Yes? Inefficient
• No? Efficient
Efficiency, Inefficiency, and Unemployment Resources,
Te le vis io n S e ts
within a PPF Framework
A
55
B
50
Effic ie nt po ints lie o n
the pro duc tio n po s s ibilitie s
fro ntie r; ine ffic ie nt po ints
lie be lo w the fro ntie r.
C
35
D
28
E
15
F
0
5
15
35
45
Cars (tho us ands )
52
Trade or exchange
• Process of giving up one thing for something
else
• Why would you trade?
– Make yourself better off
– Give up something that you value less for
something you value more
• Example: a leather jacket is $100…what
does this show??
– Value the $100 less than you value the jacket
Periods relevant to trade
• Before the trade takes place
– Ex ante
– Decision takes place  $2000 of other goods or the $2000
television set?
– Which makes me better off?
• At the point of the trade
– The $2000 changing hands
• After the trade
– Ex post
– No guarantee that trade will meet expectations
– Buyers remorse
Benefits of Trade
• Compare the consumer’s and producers point
of views
– Consumer Surplus
• Maximum buying price – price paid
• Satisfaction gained by not having to pay as much
– Producer Surplus
• Price received – minimum selling price
• Satisfaction gained by getting more than anticipated for
the good
Which makes you better off?
• Increases in Consumer or Producer
Surplus?
– Consumer
• Why?
– Price that you pay will be lower
Terms of Trade
• Trade is where things are given up to get
something else
– What things?
• Money, goods, services…
• Terms of trade is how much is given up
• Which part does buyers remorse fit into?
– terms of trade
– Where the money usually comes in
Costs of Trade
• Transaction costs
– Time and effort needed to search out, negotiate,
and consummate a trade
– May cause trades to not take place
• Don’t know about the good
• Shipping costs are too high
• Don’t like to work with salesperson
• Third-party effects
– Impacts of trade on parties not immediately involved
• Second hand smoke (negative externality)