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

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. Draw a graph with Bloody Marys on X-axis and screwdrivers on the Y-axis. 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?

Production Possibilities Frontier for Grades

Production Possibilities Frontier for Grades

More Hours of Study Shifts the Production Possibilities Frontier

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, within a PPF Framework

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 Third-party effects 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)