Chapter One Notes

Chapter 1 Econ. I’m taking a course that has the h ighest failure rate at college. Uncle Sam wants you to do better in economics. What is Economics?

Economizing Problem Dealing with “ Scarcity ”

T he H ot M ajor F or U ndergrads I s E conomics WSJ – 2005 Universities awarded 16,141 economics degrees last year at 272 colleges & universities which is up 40% in five years . There has been a clear explosion of economics as a major , particularly at the top colleges. At New York University , the econ major has doubled in 10 years . At 800 , it is now the most popular major. Economics is also the number one major at Harvard (964 students ) , Columbia (up 67 % in 5 yr . ) , Stanford , Penn , Princeton , Chicago (24% of graduating class) , and 2 nd at Brown , Yale , and University of California at Berkeley . The increase in the numbers is the result of many students seeing economics as the best vehicle promising good pay and security . Students realize that understanding economics has become a fundamental necessity of life . Economics rising popularity is even global . Econ majors in Poland have doubled in 6 years. In Russia , econ majors have jumped from 18% of students to 31% . Also, the chairman of the economics department at London School of Economics says econ’s popularity is at an all time high . “ Econ, Econ , I want to major in Econ.”

MICROECONOMICS ... “ Beautiful forest!. “ Beautiful leaf!” MACROECONOMICS ...

. Macro [national] economics – concerned with the economy as a whole Macro examines the “forest, not the trees, leaves, or specific pieces of bark.” 2. Micro [details of the big picture] – concerned with specific economic units or individual markets under a microscope. Emphasis is on individual households, industries, or firms [like the # of workers employed by Ford] [Concerns the components of the economy] Micro examines the “trees, leaves, & pieces of bark, rather than the forest.” Great Forest! Nice bark!

. Production Microeconomics Macroeconomics How much steel Total industrial output How much office space Gross Domestic P roduct Prices Price of individual goods Price of medical care Rate of inflation Employment Jobs in the steel industry Total number of jobs Economy’s unemployment “ Check out those pieces of bark!. “ Beautiful, beautiful forest!” Macro [ large ]( telescope ) “whole economy” [economy-wide issues] Micro [ small ]( microscope ] “segment of the economy” [issues in the economy]

I s the f ollowing Micro or Macro ? 1. The price of digital cameras increased 5% last year. 2. Unemployment was 5.4% for the U.S. workforce. 3. Unemployment in the auto industry was 8% last year. 4. Duck N ational Bank lowered its interest rates on CDs to 8%. 5. The Inflation rate rose to 2.7% last year. 6. The computer industry laid off 8% of its workers last year. 7. The price of gasoline rose 25% last year. “ What forest, check these branches, limbs, and leaves.”

BUT LIMITED OR SCARCE RESOURCES! SOCIETY HAS VIRTUALLY UNLIMITED WANTS ... THE FOUNDATION OF ECONOMICS

Scarcity – Wants > Availability of Resources

ECONOMICS - “Science of scarcity” - the study of the choices people make in an effort to satisfy their unlimited needs and wants from limited resources . Economics is the academic discipline most discussed by the general public. It is also one of the least understood . [“Language of graphs”] Scarcity Choices Opportunity Cost

Food , clothing , shelter , Chrysler 300, mansion, Nintendo DS, jewelry, iPod, projector, digital camera, good health, children, camcorder, laptop warmth, indoor plumbing, rollerblades, a sense of personal worth, Plasma TV, literacy, high economics grade, cell phone, compact discs, money “ Need” those first three to survive. Unlimited Human Wants Limited Resources Scarcity Problem Land , L abor, C apital , E ntrepreneur R ent, W ages, I nterest, P rofits

THE FOUNDATION OF ECONOMICS SOCIETY HAS VIRTUALLY UNLIMITED WANTS...

GOODS & SERVICES PROVIDE... UTILITY [ satisfaction ]

LUXURIES GOODS & SERVICES PROVIDE... UTILITY [ satisfaction ]

. NECESSITIES Food Clothing Shelter Luxuries V.

. S carcity Choices Opportunity Costs 1 st Choice (and a good one) The Opportunity Cost is the Opportunity Lost [“what is possible for $10,000 ”] Opportunity Cost 2 nd Choice

Trade-offs – decision ( choice ) to get more of one thing means to accept less of another. Opportunity Cost – 2 nd Choice (most important concept in economics) [what you sacrifice when you make a choice] Charlie O’Connell Sarah B Krisily “ I’m in love with both, but can have only one .” The Bachelor

And – As 40 Million Watched, Joe Millionaire chose Zora over Sarah

Economic Way of Thinking Do the Benefits outweigh the cost? Scales of Economics Expected marginal benefits Expected marginal costs Choices are primarily marginal – not all or nothing.

Trade-Offs vs. Opportunity Costs What's the difference?

Trade-Offs … are all the alternatives in making a decision Opportunity Cost … the cost of the next best use of money, time, or resources (you’re 2 nd Choice)

Trade-offs … Are all of the alternatives that go into making a decision…. In this case let’s say you have many different choices of what you want to do on Saturday night.

Here are all of your Choices on Saturday night…which are… Go on a Date Hang out with friends Watch TV Read a good book Hang out with parents Go to bed early Opportunity Cost is different, though… These are all of your trade-offs

Remember… Opportunity Cost is the next highest valued alternative. (The 2 nd Best Choice)

As you recall, these are the choices on Saturday night Go on a Date Hang out with friends Watch TV Read a good book Hang out with parents Go to bed early You choose the one that will give the most satisfaction for the price that has to be paid

The ranking’s are… Go on a Date Hang out with his friends Watch TV Read a good book Hang out with parents Go to bed early 1 2 3 4 5 6 Obviously you do not go through this much thought when making a decision…

What is the opportunity cost of going on the date?

Look again at the definition of Opportunity Cost …… the cost of the next best use of money, time, or resources

The opportunity cost was giving up the reading of a good book, the 2 nd Choice Also, you must consider the financial cost of the date, how else you could have spent the money.

Remembering Opportunity Cost when making a decision is the start of your new way of thinking, the Economic Way of Thinking .

RESOURCE PAYMENTS RENTAL INCOME INTEREST INCOME WAGES PROFIT & LOSS Property Resources LAND CAPITAL HUMAN RESOURCES LABOR ENTREPRENEUR

When It comes to Smoking, Don’t Let Your Peers Knock You Down To Their Level

Bring Your Peers Up To Your Level “ Don’t smoke, don’t Smoke.”

Review What is the fundamental economic problem? What does TANSTAAFL mean? Every choice has a __?__. Your next best use of time, $, resources? Why did the chicken cross the road? What are the 4 Factors of production, with examples please? How does economics help people make better decisions?

. S carcity is represented by the frontier line. 2. Choices - represented by pts A, B. or C. 3. Opportunity Cost is illustrated in terms of moving from one point to another when resources are utilized to their full potential. [must make choices] 4. Efficiency - producing maximum output with available resources and technology. 5. Economic growth 5 PPC Concepts

And How Is Economic Growth Demonstrated on a Graph? Like This Economic Growth A B C D a b Capital Goods Consumer Goods 0 [Ability to produce a larger total output over time]

PRODUCTION POSSIBILITIES Assumes... Efficiency Fixed Resources Fixed Technology Two Products for example... A Capital Good A Consumer Good

Using all of our resources, to get some pizza, we must give up some robot arms! for example... What if we could only produce ... 10,000 Robot Arms or 400,000 Pizzas PRODUCTION POSSIBILITIES

PIZZA 0 1 2 3 4 (in hundred thousands) Robots 10 9 7 4 0 (in thousands) in table form PRODUCTION POSSIBILITIES

PIZZA 0 1 2 3 4 (in hundred thousands) Robots 10 9 7 4 0 (in thousands) in table form graphical form Robots (thousands) Pizzas (hundred thousands) PRODUCTION POSSIBILITIES

At any one point in time, a full-employment, full-production economy must sacrifice some of product to obtain more of product . PRODUCTION POSSIBILITIES Limited Resources means a limited output...

Q Q Robots (thousands) Pizzas (hundred thousands ) 14 13 12 11 10 9 8 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8 A B C D E W Attainable but Inefficient Unattainable A ttainable & E fficient PRODUCTION POSSIBILITIES

Q Q Robots (thousands) Pizzas (hundred thousands) 14 13 12 11 10 9 8 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8 A B C D E W Attainable but Inefficient Unattainable Attainable & Efficient PRODUCTION POSSIBILITIES Notes... LAW OF INCREASING OPPORTUNITY COSTS

Q Q Robots (thousands) Pizzas (hundred thousands) 14 13 12 11 10 9 8 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8 A B C D E W Attainable but Inefficient Unattainable Attainable & Efficient PRODUCTION POSSIBILITIES Notes... LAW OF INCREASING OPPORTUNITY COSTS Economic resources are not completely adapt- able to other uses. It will be a CONCAVE curve

U U nemployment & U nderemployment Shown by Point U More of either or both is possible PRODUCTION POSSIBILITIES Q Q Robots (thousands) Pizzas (hundred thousands) 14 13 12 11 10 9 8 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8

PRODUCTION POSSIBILITIES The ability to produce a larger total output - a rightward shift of the production possibilities curve caused by... Q Q Robots (thousands) Pizzas (hundred thousands) 14 13 12 11 10 9 8 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8 Notes... Economic Growth

More of either or both is possible PRODUCTION POSSIBILITIES 1. Increase in resources - 2. Better resource quality - 3. Technological advances - Q Q Robots (thousands) Pizzas (hundred thousands) 14 13 12 11 10 9 8 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8 Notes... Economic Growth

Economic Growth Q Q Robots (thousands) Radios (hundred thousands) 14 13 12 11 10 9 8 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8 A’ B’ C’ D’ E’ PRODUCTION POSSIBILITIES

Two Examples of Economic Growth FAVORING PRESENT GOODS Goods for the Present Goods for the Future CURRENT CURVE CONSUMPTION PRODUCTION POSSIBILITIES

Two Examples of Economic Growth FAVORING PRESENT GOODS FAVORING FUTURE GOODS Goods for the Present Goods for the Future CURRENT CURVE FUTURE CURVE CONSUMPTION Goods for the Present Goods for the Future FUTURE CURVE CONSUMPTION CURRENT CURVE PRODUCTION POSSIBILITIES

Going to War (U.S.) When the U.S. entered WWI, we had severe unemployment . We were able to step up production of consumer goods and war materials simply by getting to full production . We went from 14.6% unemployment in 1940 to 1.2% in 1944 . Over 7 million people went to work that were not working in 1940 . Going to War(Russia) . Russia , on the other hand, entered WWII at full capacity . So their preparedness entailed a shifting of resources from civilian goods and a drop in their standard of living. The U.S. position was similar as we entered the Viet Nam War at full employment . We increased both military spending and domestic spending on the “War on Poverty.” Our attempt to achieve more “guns and butter” in a FE economy was doomed . We were trying to spend beyond capacity and ended up with double digit inflation in the 1970s . Civilian Goods F C United States [Beginning of WWII] War Goods Civilian Goods War Goods D C Russia [Beginning of WWII]

40. At what letter is there unemployment [ recession ]? 41. What letters represent resources being used in their most productive manner ? [full employment, full production, and best available technology] 42. What letter represents an improvement in technology , therefore a new PPC frontier line? 43. The (straight line/curve) illustrates the “line of increasing cost” ? 44. The (straight line/curve) illustrates the “law of constant cost.” 45. At what letter would there be the most economic growth in the future if a country were producing there now? 46. What is the opportunity cost when moving from “C” to “D” ; E to B ; & do we have to give anything up when moving from F to D ? F A,B,C,D,E G A Capital Consumer no A B C G D E C A P I T A L G O O D S Consumer Goods F PPC

PPC Practice Questions 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 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 B C A H G O

PPC P ractice Q uestions [continued] 5. Which of the following would cause the PPC shown (right) to shift outward? a. Reopening steel plants that had been closed 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 Steel Missiles X

. 1. Land [ natural resources ] – [ “gifts of nature ”] The Four Factors of Production “ Gifts of Nature ” Water Wind Sun Fossil fuels

. 2. Labor [ human resources ] anyone who works [ “paid work” ] A. Physical – pro athletes & lumberjacks B. Intellectual – accountants & lawyers “ Hired Help ”

. 3. Capital Resources – all “man-made inputs” used to produce consumer products (machinery, physical plants, & tools) . A. Capital goods – goods [machinery, buildings, & tools] used to produce other goods . [crane, Ford plant, hammer]

. 4. Entrepreneurship – Combines land, labor, & capital to produce products . Resource payments . The resource owners receive rent [for the use of their land; wages [for their labor]; interest [payment for financial capital], and profits [for their entrepreneurial ability]. Rent Wages Interest Profits Land Labor Capital Entrepreneur

. Real Capital v. Financial Capital INVESTMENT FINANCIAL CAPITAL [stocks, bonds, & money] REAL CAPITAL [tools, machinery, & factories] Can produce something directly with these Can’t produce anything directly with these Notes...

The Harley Hog Circular Flow Product Market Resource Market

Hog CIRCULAR FLOW MODEL BUSINESSES HOUSEHOLDS PRODUCT MARKET Mechanic RESOURCE MARKET 1 2 3 4 Flow 4. Goods/services Flow 3: C onsumer expenditures

Hog CIRCULAR FLOW MODEL BUSINESSES HOUSEHOLDS PRODUCT MARKET Mechanic RESOURCE MARKET 1 2 3 4 Flow 4. Goods/services Flow 3: C onsumer expenditures Flow 1: L and, L abor, C apital, E ntrepreneur Flow 2: R ent, Wages, Interest, Profits

CIRCULAR FLOW MODEL BUSINESSES HOUSEHOLDS PRODUCT MARKET Householders demand hogs & will pay Mechanic RESOURCE MARKET Businesses supply hogs g/s I demand that hog & will pay.

BUSINESSES HOUSEHOLDS RESOURCE MARKET PRODUCT MARKET GOODS & SERVICES GOODS & SERVICES $ CONSUMPTION $ REVENU E Resource Market Mechanic Businesses Show me the money! & you’ll get this hog. CIRCULAR FLOW MODEL Householders

BUSINESSES HOUSEHOLDS RESOURCE MARKET PRODUCT MARKET GOODS & SERVICES GOODS & SERVICES $ CONSUMPTION $ REVENU E Resource Market Mechanic Householders Businesses I demanded this hog and had to pay for it. Show me the money! & you’ll get this hog. CIRCULAR FLOW MODEL

BUSINESSES HOUSEHOLDS RESOURCE MARKET PRODUCT MARKET GOODS & SERVICES GOODS & SERVICES $ CONSUMPTION $ REVENU E Resource Market Mechanic Householders HH supply hog labor H.D. demands hog labor & will pay Businesses Show me the money! & you’ll get this hog. I demanded this hog and had to pay for it. CIRCULAR FLOW MODEL

HOUSEHOLDS $ COSTS $ INCOMES GOODS & SERVICES GOODS & SERVICES PRODUCT MARKET Resource Market BUSINESSES Give me your hog labor & I’ll show you the money. CIRCULAR FLOW MODEL

HOUSEHOLDS $ COSTS $ INCOMES GOODS & SERVICES GOODS & SERVICES PRODUCT MARKET Resource Market BUSINESSES CIRCULAR FLOW MODEL I supplied hog labor & was paid..

BUSINESSES HOUSEHOLDS RESOURCE MARKET RESOURCES INPUTS $ COSTS $ INCOMES PRODUCT MARKET GOODS & SERVICES GOODS & SERVICES $ CONSUMPTION $ REVENUE CIRCULAR FLOW MODEL

The Circular-Flow Diagram Businesses Product Market Resource Market Households 1 2 3 4 Labor What flow are the following? A. Consumer expenditures? B. Goods and services? C. Land, labor, capital, and entrepreneurs? D. Rent, wages, interest, and profits? 2 1 4 3

The Circular-Flow Diagram Households Product Market Resource Market 2 3 4 What flow are the following? A. Goods/services? B. Consumer expenditures? C. Land, labor, capital and entrepreneurial ability? Rent, wages, interest, and profits? Businesses 1 4 3 1 2

NS 56-59 56. In the product market (householders/businesses) are the demanders and (householders/businesses) are the suppliers . 57. In the resource market (householders/businesses) are the demanders and (householders/businesses) are the suppliers . 58. In the resource market , (householders/businesses) sell resources to (householders/businesses). 59. In the product market , (householders/businesses) sell products [goods/services] to (householders/businesses). Fuzzy Wuzzy

And finally – the real opportunity cost of a bad education is that you have to drive a Communist Car . Which would begin to rust while still in the show room, Would shake when it hit 35 mph, Would break in half going over RR tracks, And would never be stolen even if you left the keys in it with the motor running. YUGO Only way to get up a hill

The Yugo on the inside or under the hood Anytime you filled the Yugo with gas, you doubled its value. Putting seats in tripled its value.]

Chapter One Notes

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Chapter One Notes