Lecture 1

 
 

The nature and method of economics

or, limits, alternatives, and choices

 
 

Purpose of this chapter: to introduce concepts important in the course

 
 

Know answers of questions to ponder - key to passing course

 
 

An economy : is a system for producing, consuming and distributing wealth (and income)

 
 

Economics - the study of the choices people make in using scarce resources to meet their wants.

• Or how society individuals, and institutions make optimal (best) choices under conditions of scarcity
  

   
   

Characteristics of the resource capital:

Is people made

Takes current resources to produce

Enhances future production

Can be enhanced through investment

 
 

Examples : factories, buildings, machines, etc

 
 

Note :things like stocks and bonds and money are not capital

in the sense of economics

 
 

Free good: A good is a free good when the amount available is a greater than the amount people want a zero price

• Very hard to find
  

 
 

Economic good: a good is an economic good when the amount available is less than the amount people want at a zero price.

 
 

Question 8 :

Economic perspective

Scarcity and choices:

• Individuals, firms, and the gov't face constraints because of scarcity
  
  • Constraints:
    
    • Individuals: income, prices, and time
      
    • Businesses: prices of inputs, production, techniques, and firm revenues.
      
    • Governments: revenues for budgets
      
• Choices entail costs and benefits
  
• People make choices based on costs and benefits
  

 
 

Rational behavior (that is: purposeful behavior):

• People are adaptable and respond to changes in perceived costs
  

  and benefits
  

   
   

Marginal analysis( or economic perspective):

• Undertake activity if marginal benefits exceed marginal costs.
  

 
 

Economics provides a framework for analyzing a whole host of problems

 
 

Microeconomics - small parts comprising the economy

• Wages
  
• Prices
  
• Output
  
• Employment
  

   
   

Macroeconomics - has to do with the overall economy (aggregates).

• Wages
  
• Prices
  
  • Consummate prices
    
• Output
  
  • GDP
    
• Employment
  
  • More than the 100 million people employed
    

     
     

Key themes:

• Scarcity
  
  • There are not resources to satisfy everyone's wants and needs
    
• Choice
  
  • Decisions made under the circumstance of scarcity
    
• Resources (factors of production)
  
  • Labor
    
    • Physical Labor (muscle power)
      
    • Innate ability
      
  • Capital
    
    • Physical Capital
      
    • Money is not capital only claims on physical goods
      
    • Human capital
      
      • Can be upgraded
        
    • Land = all natural resources
      
      • Forests
        
      • Minerals
        
      • Water
        
      • Etc.
        
    • Entrepreneur
      
• Specialization
  
  • It enhances society's output
    
    • How?
      
      • Ability differences
        
      • Learning by doing
        
      • Saving time
        
    • In short, specialization ( both human and geographical) is essential in achieving efficiency in the use of resources
      
• Exchange
  
  • Change of goods
    

     
     

What is a theory, principle law?

 
 

Theory: a logical

• If this, suppose.
  

   
   

Positive statement- "What is " statement - focuses on facts and cause and effect

Normative statement - "what ought to be" statement - what an economy should be like

 
 

• Why do economists disagree -
  
  • About the theory
    
  • About how to apply a theory, i.e don't like the outcome
    

     
     

   
   

   
   

   
   

   
   

   
   

   
   

   
   

   
   

   
   

   
   

 
 

Issues

Thursday, August 30, 2007

1:27 PM

 
 

1. Suppose we are all granted 100 billion with which we can do whatever we choose. Therefore, one can assert that we are no longer subject to scarcity.
   

    
    

   You may assume that (true, false, uncertain) the goods and services can be produced.
   

    
    

   FALSE, There is still a constraint on time which you can not get around
   

    
    

2. Poverty, and scarcity mean the same thing?
   

    
    

   You can eliminate poverty but you can never eliminate scarcity.
   

   People can come up with a def. of poverty and once your out of that range you can come out of poverty however you can never get rid of scarcity.
   

    
    

    
    

 
 

 
 

Lecture 2

Tuesday, September 04, 2007

12:31 PM

 
 

Review on Wednesday 4:30 342B Purnell

 
 

Constraints and Choices

Individuals : income, prices, and time

Business : prices of inputs, production techniques and firm revenues

Governments: revenues for budgets
 

Scarcity and choices:

• Individuals, firms, and the government face constraints because of scarcity
  
• Choices entail costs and benefits
  
• People make choices based on costs and benefits
  

   
   

Rational Behavior (that is : purposeful behavior):

• People are adaptable and respond to changes in perceived costs and benefits
  

   
   

Marginal analysis (Economic Perspective)

• Undertake activity if marginal benefits exceed marginal costs
  

   
   

 
 

CHAPTER 2 - The economizing problem

Questions to ponder

 
 

• Scarcity and Choice
  
• Opportunity cost:
  
  • The cost of a good or service measured in terms of the lost opportunity to pursue the best alternative activity^ with the same time and resources
    
    • Alternatively the opportunity cost of alternative x is the value of the best alternative activity given up when activity x is chosen
      
• Productive Efficiency: The property of acting with a minimum expense, effort, and waste. Produce goods at least cost!
  

  Allocative Efficiency: Resources are used to obtain the particular mix of products society wants the most. Produce what society wants at least cost.
  

  If society is NOT acting efficiently, output could be increased with the same amount of resources.
  

  Criteria used by policy makes :
  

  • Equity, Equality, or Fairness
    
  • Liberty - freedom to act how you want in an economic world with out government intervention
    
• The Production Possibility frontier - A graph showing the maximum possible combinations of goods that can be produced in an economy given the available factors of production and technology (at a fixed point in time)
  
  • PPF = PPC - curve
    
    • Assume:
      
      • Full employment and full production
        
      • Only two products: Guns and Roses
        
      • Fixed Technology
        
      • Fixed resources
        

         
         

• Marginal analysis refers to an analysis that involves examining a small increase or decrease in a particular economic activity.
   
  

  Opportunity costs are ( MUST BE ) avoidable!
  

  Sunk Costs: costs not recoverable at the time of the decision
  

  Only future costs and benefits are relevant to economic decision making
  Marginal costs - FUTURE GAINS OR BENEFIT
  

   
   

   
   

   
   

   
   

   
   

 
 

 
 

 
 

 
 

Lecture 3

Thursday, September 06, 2007

12:31 PM

Opportunity cost of time-

CP 8 - Concord

 
 

NO SACRIFICE NO OPPORTUNITY

 
 

Key Idea in PG 12: When you divide on number by another, you interpret the result as the value in the numerator per one unit of what's in the denominator

 
 

Total income/ population

Result: income per (one) person

 
 

Change in roses / change in guns

Changes in roses per one unit change in guns

 
 

Change in guns / change in roses

Changes in guns per one unit change in roses

 
 

Why does the opportunity cost of extra guns in terms of roses foregone rise as we produce more guns?

 
 

Law of increasing relative costs or law of increasing opportunity cost

 
 

First to move out of
an industry are the best at producing the other good (in this case roses) and the least best at producing roses

 
 

• Explain curve of the graph since resources are not equally adaptable thus when you get closer to the origin then you lose more skilled workers in that industry
  
  • You give up more roses since the best rose makers are being transferred to do a job they are not that good at
    

     
     

Why is the PPC curve bowed out?

 
 

Resources are not equally adaptable in

 
 

How can we illustrate the concept of scarcity in the PPC?

This is the maximum production since this is given ideal land, labor

 
 

How can we illustrate the concept of unemployment in the PPC?

Drawing a point in the graph ( unemployment is inefficient)

 
 

Suppose the technology for guns improves with no effect on roses.

What will happen to the PPC?

The PPC curve will shift out.

 
 

Illustrate a natural disaster or war in the PPC?

The curve shifts in

 
 

Economic Growth?

The curve shifts to the right.

 
 

 
 

 
 

 
 

Lecture 3 - A ch3(1-8)

Thursday, September 06, 2007

1:28 PM

Chapter 3

 
 

Purpose of the Chapter - To show how prices and quantities are determined in a market Economy

 
 

Questions to Ponder

1. What is meant by the concept "law of demand"?
   

   Demand - A relation showing the various maximum amounts of a commodity that buys are willing and able to purchase at different prices, during a given amount of time, all other factors the same
   

   1. Commodity - any good or service
      
   2. Buyers - we are dealing with consumers
      
      1. Households - their objective to maximize satisfaction
         
   3. You may be willing to purchase an item but not able due to your budget
      
      1. Effective demand - being both willing and able to purchase a good or service
         
   4. Demand has a time element - it is a flow concept
      
   5. All other factors the same: ceteris paribus
      
      1. Objective : isolate the effect of a change in the price of good x, ceteris paribus
         

          
          

   Law of Demand : the law that the quantity of a good demanded by buyers tends to increase as the price of the good decreases and tends to decrease as the price increases, other things being equal
   

    
    

2. What does an economist mean by the term relative prices?
   

   Price relative to other products / income
   

    
    

   How does this relate to the law of demand?
   

   If relative price remains the same then demand is the same, other wise it changes
   

    
    

3. What are three ways to show this law? Graphs
   

    
    

4. What is the difference between a Change in Quantity demanded of a good or service and a Change in Demand of a good or service?
   

    
    

   Up - change in demand
   

   Down - change in demand
   

    
    

   Change in demand - shift the whole curve
   

• Because of any of the detriments
  

 
 

Increase in demand - the quantity demanded is more at each price

• At a given quantity people are willing to purchase
  

   
   

Decrease in demand - the quantity demanded is less at each price

 
 

PYNTE - prices of related goods

 
 

Economic analyses of demand and supply assume that ALL economic players rely on relative prices when making decisions!

 
 

Why can we assume price changes are relative price changes?

 
 

Lodgers - Scarcity choice sacrifice opp. Cost technology effiency

Health care -scarcity, rationing ( who is getting the good), opp. Cost, efficiency, capital, resources, economic perspective, incentives to adjust to changes in constraints, normative (ethics), profit maximization

 
 

• What is meant by the term "Law of Supply"?
  

  The relation showing various maximum amounts of a commodity that sellers would be willing and able to make available for sale at alternative prices during a given period of time, all other factors the same.
  

   
   

  Sellers or firms - they are different people from households and make their decisions for different reasons - profit maximization
  

   
   

  Household's objective : maximize satisfaction
  

   
   

  What kind of relationship would we expect to exist between the price of a good and the quantity supplied by producers? (positive? Negative?)
  

   
   

  Law of supply: the law that the quantity of a good supplied by producers tends to increase as the price of the good increases and tends to decrease as the price decreases, other things being equal
  

   
   

  Things that could affect supply - availability, price of inputs, technology, price of beef, taxes and subsidies, nature
  

   
   

  In order to entice
  

   
   

• What does an economist mean by the term relative prices?
  If all things remain the same
  

   
   

• Ways to show law of supply?
  

1. Tables
   
2. Graphs
   
3. Equations
   

    
    

1. What is the difference between a change in quantity supplied of a good or service and a change in supply good or service?
   

   Only thing that can cause a change of demand of beef or change of supply of beef is PRICE.
   

    
    

   Increase of supply
   

   At a given price suppliers will put more on the market than at the previous supply curve
   

   Before increase in supply the price will go down.
   

   At a given quantity seller are now willing to put the same quantity for a lower price.
   

    
    

   Decrease of supply
   

   At a given price suppliers will put less on the market than at the previous supply curve
   

   At a given quantity seller are now willing to put the same quantity for a higher price
   

    
    

   T : Technology - curve will shift to the right
   

    
    

   I : Inputs prices and availability - curve goes up (decreases in supply)
   

    
    

   P : Prices of related goods -
    
   

   T : Taxes and subsidies - taxes (decrease in supply) / subsidies (Increase in supply
   

    
    

   E : Expectations
   

    
    

   N : nature and numbers of suppliers
   

    
    

    
    

    
    

    
    

    
    

    
    

 
 

 
 

Lecture 4 - ch3 (9-14)

Thursday, September 13, 2007

12:26 PM

1. What is meant by the concept of equilibrium?
   

   Why is the concept of equilibrium important to the discussion of supply and demand?
   

    
    

   Equilibrium : A position which if you attain it there is no incentive to change.
   

    
    

   In our analysis: equilibrium occurs at a price where the amounts of beef that producers are willing to place on the market just equal the amounts of beef that consumers are willing to purchase
   

   There is no incentive to change
   

    
    

2. What are the different ways to illustrate the concept of equilibrium in supply and demand?
   

   Qd = Qs
   

    
    

3. When a particular market is not in equilibrium, what role do inventories play in helping guide the market back to equilibrium?
   

   
   Shortage - as used in economics, an excess quantity demanded at a given price. = excess demand- sellers market
   

    
    

   Shortage is not scarcity
   

    
    

   Consumers are competing for quantity of goods - price goes up
   

    
    

   Surplus - excess supply - buyers market
   

    
    

4. How do equilibrium prices and quantities change in response to changes in demand and / or supply
   

    
    

    
    

   An equation can be represented by
   

   Y = mx +B
   

   Here Y is the variable on the vertical Axis, and x is the variable on the Horizonta
   

    
    

   Therefore, m = (change in Y) / (change in x)
   

    
    

   In our context the equation for the demand curve is : P = A - m
   

    
    

   What is the slope of the line?
   

   What is the Y - intercept ?
   

   P = A - Mq : m = (change in P) / Change in Q)
   

   P = 1 - .1Q (change in P / change in Q) =
   

    
    

    
    

    
    

    
    

    
    

 
 

 
 

Lecture 5

Thursday, September 20, 2007

12:34 PM

Chapter 4

The Market System and the Circular Flow

 
 

Chapter 5

The Mixed Economy : Private and Public Sectors

 
 

1. What does the economist mean by the term market?
    
   

   Market : any arrangement that people have for trading with one another. (consists of buys and sellers of a particular good or service)
   

    
    

   Examples of Markets?
   

• Some are limited to a specific time and place
  
• Some span a large territory where participants never meet each other
  
• Some are very sophisticated, some are not
  
• Some are crazy markets
  

   
   

1. What are the basic characteristics of an efficiently functioning market economy?
   

    
    

• Private property and freedom to negotiate binding legal contracts - CRITICAL
  
• Property rights: property legally acquired is protected from invasions by others
  
  • People are free to exchange or give away property as long as their actions do not violate other people's similar rights.
    
• Freedom of enterprise and choice
  
  • Individuals can be entrepreneurs
    
  • Workers can choose jobs
    
  • Consumers can buy what they want
    
  • Owners can use resources as they want
    
  • There is limited government
    

  Democracy indicates the durability of freedoms
  

  Security of property:
  

  • Taxes are non confiscatory
    
  • Contracts are enforced
    
  • Trade is free
    
  • Etc..
    

     
     

  People need to know these freedoms will not disappear
  

   
   

• Markets and prices coordinate economic activity
  

   
   

  Ration function of prices: Is the process by which prices direct the existing supply of a product to users who value it most highly (consumers side of the market)
  

   
   

  Allocative function of prices :process by which prices signal resources to enter into the production of goods and services whose prices exceeds the cost of production and away from production of goods whose prices lie below production costs (producers side of the market)
  

  
  Markets provide information through prices and profits
  

   
   

• Self interest is the driving force behind capitalism
  

   
   

• Competition among buyers and sellers is a controlling mechanism
  

   
   

• There is a limited role of government (laissez faire)
  Minimal government intervention into the economy
  
  • Enforce contracts
    
  • Provide for public goods
    
  • Provide key services to the public
    
  • Account for market failures
    
  • Regulate markets where appropriate
    

   
   

• Specialization according to comparative advantage.
  

   
   

  Comparative Advantage : a state or nation ( or person) has a comparative advantage in some product when it can produce it at a lower opportunity cost than some other state or nation ( or person)
  

   
   

  Comparative Advantage Example : should Tiger Woods mow his own lawn or hire someone to do
  

  it?
  

   
   

   
   

  Bases of Comparative Advantage
  

  For individuals :
  

  • Human and Physical Capital
    
  • Skill and ability (Natural Endowments)
    
  • Superior Knowledge
    
  • Experience
    

  
  For different countries:
  

  • Different endowments of fertile soil and minerals
    
  • Different amounts of skilled labor
    
  • Different levels of technical knowledge