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?  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 MajorStarting Median SalaryMid-Career Median Salary Chemical Engineering$63,200$107,000 Economics$50,100$98,600 Physics$50,300$97,300 Math$45,400$92,400 Physician Assistant$74,300$91,700 Finance$47,900$88,300 MIS$49,200$82,300 Chemistry$42,600$79,900 Marketing$40,800$79,600 Political Science$40,800$78,200 Accounting$46,000$77,100 Management$43,000$72,100 History$39,200$71,000 Journalism$35,600$66,700 English$38,000$64,700 Psychology$35,900$60,400 Source:

Mini Experiment  Incentives Matter!  “There are no $5 bills laying on the ground.”

Economic Fundamentals  Self Interest Rationality Maximizing behavior Responding to incentives  TANSTAAFL Scarcity  Opportunity costs There Ain’t No Such Thing As A Free Lunch 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

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!

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: $50 2.$120 3.$300 4.$400 1.$50 2.$120 3.$300 4.$400

“I’d like to introduce you to Marty Thorndecker. He’s an economist but he’s really very nice.” Greg Delemeester

Economic Fundamentals  Unintended Consequences CAFE standards  27.5 MPG fleet average  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

Guns Sold (Millions) Gun-Related Murders (Thousands) Correlation is not causation.

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!

 Policy Implications [How to deter crime?] Increase jail sentence Increase probability of arrest Increase probability of conviction Increase income Economic Model of Crime

Which of the following will cause property crime to increase? a)An increase in jail terms. b)A decrease in personal incomes. c)An increase in the probability of arrest. d)A decrease in the expected benefit. a)An increase in jail terms. b)A decrease in personal incomes. c)An increase in the probability of arrest. d)A decrease in the expected benefit

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 Ameritech.

a)$19,000 b)$21,000 c)$65,000 d)$84,000 What is the minimum value of Tina’s opportunity cost for pursuing her first choice? st 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 Ameritech.

Production Possibilities Frontier  Shows tradeoffs facing an economy that produces two goods  Assumptions Resources are fixed  Land  Labor  Capital  Entrepreneurship Technology is fixed Beer Cars A B C D E Unattainable Inefficient

Assume a concave production possibility frontier. Suppose that the society decides to increase the production of beer by 20,000 kegs, and that as a result the output of cars falls by If a further increase of 20,000 kegs of beer is sought, we can expect that the output of cars will: a)fall by b)fall by less than c)fall by more than d)increase by less than a)fall by b)fall by less than c)fall by more than d)increase by less than

Beer Cars A B C D Δ Beer - Δ Cars Slope of PPF = - Δ Cars / Δ Beer Concave PPF implies “law of increasing opportunity cost” (measures the Opportunity Cost)

 Shifts in the PPF are due to: Change in resources Change in technology  Shifts in the PPF are due to: Change in resources Change in technology PPF and Economic Growth Economic Growth requires an expanding PPF

 Examples Cars v. Beer: more efficient brewing process Houses v. Computers: immigration Jazz v. Shrimp: Hurricane Katrina Food v. Electronics: China’s Cultural Revolution Production Possibilities Frontier

Consider the PPF depicted below. A reduction in the amount of unemployment could be described as the movement from: a)A to B b)B to D c)D to C d)B to E a)A to B b)B to D c)D to C d)B to E 12345

 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 Choices, choices, choices…

And now for a little humor…

Communism: You have two cows. The government takes both of them and gives you part of the milk.

Socialism: You have two cows. The government takes one and gives it to your neighbor.

Fascism: You have two cows. The government takes both cows and sells you the milk.

Nazism: You have two cows. The government takes both cows, then shoots you.

Bureaucracy: You have two cows. The government takes both of them, shoots one, milks the other, then pours the milk down the drain.

Capitalism: You have two cows. You sell one and buy a bull.

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  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 Cars ∆C = 50 ∆C = 25 ∆P = -200 ∆P = -300 Country A Country B Opportunity cost of 1 Car is 4 PizzasOpportunity cost of 1 Car is 12 Pizzas slope = ∆P/ ∆ C = -200/50 = - 4/1 slope = ∆P/ ∆ C = -300/25 = - 12/1 Country A has the comparative advantage in producing cars.

Pizza Cars Country A Pizza Cars Country B No TradeWith Trade PizzaCarsPizzaCars A B World Production

Assume that Robinson and Crusoe live on a desert island. With a day’s labor, Robinson can produce 6 fish or 4 coconuts; Crusoe can produce 3 fish or 1 coconut. Robinson’s opportunity cost of producing 1 coconut is ____, and he should specialize in the production of ____ a)1/4 fish; coconuts b)1.5 fish; coconuts c)3 fish; fish d)6 fish; coconuts a)1/4 fish; coconuts b)1.5 fish; coconuts c)3 fish; fish d)6 fish; coconuts

No TradeWith Trade ComputersWineComputersWine Germany Belgium World Belgium Germany Germany trades 3W for 9C ΔW = - 3 ΔC = 9 Belgium: 1W : 5CGermany: 1W : 2C

Output per hourOpportunity cost of … CountryTons of Steel Bushels of Wheat 1 ton of steel 1 bushel of wheat US660 South Korea36 USSouth Korea SteelWheatSteelWheat Production change-6+60 Trade Consumption change 10 W 2 W 1/10 S 1/2 S US switches 1 hour of labor from steel to wheat SK switches 4 hours of labor from wheat to steel Trade: 50 W for 10 S Problem Set 1: #21

Corner offices in high-rise office buildings usually cost more to rent than other offices. This best illustrates the economic principle of: a)Scarce resources b)Marginal analysis c)Equilibrium d)Opportunity costs a)Scarce resources b)Marginal analysis c)Equilibrium d)Opportunity costs 12345

a)Zero—the ticket is free. b)$15 c)$55 d)$40 a)Zero—the ticket is free. b)$15 c)$55 d)$40 A friend comes up to you and offers to give you a free ticket to the local professional team's baseball game that night. You decide to attend the game. It takes five hours to go to the game and costs you $15 for transportation. If you had not attended the game, you would have worked at your part-time job for $8 an hour. What is the cost of you attending the game? 12345

a)10 million cups of tea b)5 million scones c)10 million scones d)The answer is impossible to determine from the information given. a)10 million cups of tea b)5 million scones c)10 million scones d)The answer is impossible to determine from the information given. In the accompanying figure, Tealand is currently producing at point C on its production possibilities frontier. What is the opportunity cost in Tealand of increasing the production of tea from 20 million cups to 30 million cups? 12345

a)International trade will increase the average income of Americans. b)Higher expenditures on health care will reduce infant mortality rates. c)We ought to reduce our dependence on oil imports in order to increase our national security. d)Increased defense spending will lead to higher budget deficits. a)International trade will increase the average income of Americans. b)Higher expenditures on health care will reduce infant mortality rates. c)We ought to reduce our dependence on oil imports in order to increase our national security. d)Increased defense spending will lead to higher budget deficits. Which of the following is a normative statement? 12345

a)you will be better off if you eat one more slice. b)the total cost of eating the pizza will be more than the total benefit of eating the pizza. c)you will be worse off if you eat one more slice. d)you will be no better off and no worse off from eating one more slice. a)you will be better off if you eat one more slice. b)the total cost of eating the pizza will be more than the total benefit of eating the pizza. c)you will be worse off if you eat one more slice. d)you will be no better off and no worse off from eating one more slice. While eating pizza, you discover that the marginal benefit of eating one more slice is greater than the marginal cost of that slice. You then conclude: 12345

Which of the graphs below shows the impact of scientists developing a more powerful fertilizer? a)Figure A b)Figure B c)Figure C d)Figure D a)Figure A b)Figure B c)Figure C d)Figure D 12345

If they spend all night writing computer programs, Derek can write 10 programs while Tian can write 5. If they spend all night making sunglasses, Derek can make 6 while Tian can make 4. From this information we know that: a)Tian’s opportunity cost of writing programs is less than that of Derek. b)Derek’s opportunity cost of writing programs and of making sunglasses is less than that of Tian. c)Tian’s opportunity cost of writing programs and of making sunglasses is less than that of Derek. d)Derek’s opportunity cost of writing programs is less than that of Tian. a)Tian’s opportunity cost of writing programs is less than that of Derek. b)Derek’s opportunity cost of writing programs and of making sunglasses is less than that of Tian. c)Tian’s opportunity cost of writing programs and of making sunglasses is less than that of Derek. d)Derek’s opportunity cost of writing programs is less than that of Tian

 Problem Set 1: #14 Go to college Tuition$17,000 Food + Rent$ 7,000 Parties$ 3,000 Books$ 600 Car$ 3,600 Don’t go to college Job$19,000 Food + Rent$ 7,000 Parties$ 3,000 Car$ 3,600 Cost of going to college =$17,000+ $600+ $19,000= $36,600 Sue Student