15 FUNDAMENTAL CONCEPTS BEGINNING WITH THE END IN MIND.
Transcript of 15 FUNDAMENTAL CONCEPTS BEGINNING WITH THE END IN MIND.
SCARCITYSCARCITY
THE ECONOMIC PROBLEMLIMITED RESOURCES VS. UNLIMITED
WANTS AND NEEDSSCARCITY NECESSITATES CHOICE
OR
TRADEOFFS/OPPORTUNITY TRADEOFFS/OPPORTUNITY COSTSCOSTS
ALL CHOICES INVOLVE TRADEOFFS– YOU MUST CHOOSE A OR B
“THERE IS NO SUCH THING AS A FREE LUNCH”
SLEEP OR SCHOOL? WORK OR FRIENDS?
A DOLLAR SPENT ON VACTION IS A DOLLAR NOT SPENT ON RETIREMENT
OR
TRADEOFFS/OPPORTUNITY TRADEOFFS/OPPORTUNITY COSTS COSTS
GUNS VS. BUTTER
CLEAN ENVIRONMENT VS. HIGHER INCOMES
OR
OR
TRADEOFFS/OPPORTUNITY TRADEOFFS/OPPORTUNITY COSTSCOSTS
EFFICIENCY VS. EQUITYGETTING THE MOST OUT OF
SCARCE RESOURCES VS. FAIRNESS OF DISTRIBUTION
TRADEOFFS/OPPORTUNITY TRADEOFFS/OPPORTUNITY COSTSCOSTS
REDISTRIBUTION OF INCOME THROUGH UNEMPLOYMENT AND WELFARE REDUCES INCENTIVE TO WORK HARD
MORE EQUAL SLICES BUT SMALLER PIE
TRADEOFFS/OPPORTUNITY TRADEOFFS/OPPORTUNITY COSTS COSTS
ALL TRADEOFFS INVOLVE OPPORTUNITY COSTS– THE COST OF THE NEXT BEST
ALTERNATIVE USE OF TIME, MONEY OR RESOURCES
SLEEPING IN SATURDAY MORNING COSTS $35?!?!?!?!?
TRADEOFFS/OPPORTUNITY TRADEOFFS/OPPORTUNITY COSTSCOSTS
EXPLICIT + IMPLICIT COSTS TRUE COST OF COLLEGE??
– EXPLICIT=TUITION AND BOOKS– IMPLICIT=LOST WAGES ($10/HOUR =
~$20,000/YEAR
SHOULD TOP ATHLETES STAY IN COLLEGE?
RATIONAL PEOPLE THINK RATIONAL PEOPLE THINK AT THE MARGINAT THE MARGIN
MUST WEIGH ADDITIONAL COSTS WITH ADDITIONAL BENEFIT
MARGINAL COST IS THE ADDITIONAL COST OF AN ADDITIONAL UNIT
MARGINAL BENEFIT IS THE ADDITIONAL BENEFIT FROM AN ADDITIONAL UNIT
RATIONAL PEOPLE THINK RATIONAL PEOPLE THINK AT THE MARGINAT THE MARGIN
NEVER LET YOUR MARGINAL COSTS EXCEED YOUR MARGINAL BENEFITS
MC=MR PROFIT MAXIMIZATIONSHOULD THE AIRLINE SELL THE $500
TICKET FOR $100 TEN MINUTES BEFORE TAKEOFF???
PEOPLE RESPOND TO PEOPLE RESPOND TO INCENTIVESINCENTIVES
DECISIONS MADE TO GAIN BENEFIT OR PROFIT AND TO AVOID LOSS OR PAIN
KNOWING PEOPLE RESPOND PREDICTALBLY TO INCENTIVES SHOULD BE KEPT IN MIND WHEN SETTING PUBLIC POLICY
PEOPLE RESPOND TO PEOPLE RESPOND TO INCENTIVESINCENTIVES
SUV TAX BREAKTAXES, UNEMPLOYMENT BENEFITSSOCIAL SECURITYLATE SLIPS
RELATIVE SCARCITYRELATIVE SCARCITY
DEMAND FOR A GOOD OR SERVICE IN RELATION TO THE SUPPLY OF THAT GOOD
1000 < 10BALLPLAYERS VS. TEACHERSRELATIVELY SCARCE GOODS = $$$$$
VOLUNTARY EXCHANGEVOLUNTARY EXCHANGE
BOTH PARTIES EXPECT TO BE BETTER OFF AFTER THE EXCHANGE
WIN/WIN SITUATIONCOMPETITION BETWEEN
BUYERS/SELLERSNET GAIN IS POSITIVE FOR BOTH
PARTIES
SPECIALIZATION LEADS TO SPECIALIZATION LEADS TO INTERDEPENDENCEINTERDEPENDENCE
SPECIALIZATION: CONCENTRATION OF PRODUCTIVE EFFORTS…LEADS TO GREATER EFFICIENCY
BASED ON COMPARATIVE ADVANTAGE…WHO HAS THE LOWEST OPPORTUNITY COST?
FORCES RELIANCE ON OTHERS TO LIVE
PRICE=SUPPLY + DEMANDPRICE=SUPPLY + DEMAND
SUPPLY DEMAND PRICE
SUPPLY DEMAND PRICE
DEMAND SUPPLY PRICE
DEMAND SUPPLY PRICE
PRICE=SUPPLY + DEMANDPRICE=SUPPLY + DEMAND
MARKET SYSTEM DEPENDS ON PRICES AND SELF-INTEREST TO GUIDE RESOURCES
PRICES=SUPPLY+DEMANDPRICES=SUPPLY+DEMAND
HOUSEHOLDS (DEMAND) AND FIRMS (SUPPLY) INTERACT
ADAM SMITH…INVISIBLE HAND, LAISSEZ FAIRE
ADAM SMITHADAM SMITH
“…IT IS NOT THE BENEVOLENCE OF THE BUTCHER, THE BREWER, OR THE BAKER THAT WE EXPECT OUR DINNER, BUT FROM THEIR REGARD TO THEIR OWN INTEREST…”
PRICE = SUPPLY+ DEMANDPRICE = SUPPLY+ DEMAND
COMMAND ECONOMY…DECISIONS MADE BY GOVERNMENT
CENTRALLY PLANNED – WHAT IS PRODUCED?– HOW MUCH IS PRODUCED?– FOR WHOM? WHO SHOULD PRODUCE?
PRICE = SUPPLY+ DEMANDPRICE = SUPPLY+ DEMAND
COMMAND ECONOMIES– DO NOT MAXIMIZE SOCIAL WELFARE IF
RESOURCES ARE NOT GUIDED EFFICIENTLY
COMMAND ECONOMIES MAY PROVIDE FOR RAPID SHIFTS IN ECONOMIC ACTIVITY BUT PERFORM POORLY IN THE LONG RUN
COMPETITION DRIVES COMPETITION DRIVES EFFICIENCYEFFICIENCY
EFFICIENCY– ALLOCATIVE OR ECONOMIC
GETTING WHAT THE ECONOMY WANTS
– TECHNICAL PRODUCING THE MOST WITH THE FEWEST
AMOUNT OF RESOURCES
COMPETITION INCREASES BOTH LEVELS OF EFFICIENCY
COMPETITION DRIVES COMPETITION DRIVES EFFICIENCYEFFICIENCY
SPORTSACADEMICS??? DRIVE BEHIND
VOUCHERSWALMART VS KMARTMUSIC INDUSTRYINTERNET ACCESS AND SERVICES
PUBLIC GOODS AND PUBLIC GOODS AND MARKET FAILURESMARKET FAILURES
PRIVATE GOODS– EXCLUDABLE– RIVAL
CLOTHING, FOOD, DVD PLAYERS…
PUBLIC GOODS– NON-EXCLUDABLE– NON-RIVAL
DEFENSE, ROADS, PUBLIC PARKS
Types of GoodsTypes of Goods
Rival?
Yes No
Yes
Private Goods Ice-cream cones Clothing Congested toll roads
Natural Monopolies Fire protection Cable TV Uncongested toll roads
No
Common Resources Fish in the ocean The environment Congested nontoll roads
Public Goods National defense Knowledge Uncongested nontoll roads
Excludable?
PUBLIC GOODS AND PUBLIC GOODS AND MARKET FAILURESMARKET FAILURES
PRIVATE MARKETS HAVE NO INCENTIVE TO PROVIDE FOR PUBLIC GOODS…THIS NECESSITATES GOVERNMENT INVOLVEMENT
COMMON POOL RESOURCES– NON-EXCLUDABLE– RIVAL (DEPLETABLE)
PUBLIC GOODS AND PUBLIC GOODS AND MARKET FAILURESMARKET FAILURES
EXTERNALITIES…ECONOMIC SIDE EFFECT THE IMPOSES COSTS OR BENEFITS ON SOMEONE OTHER THAN THE PRODUCER AND THE CONSUMER
PUBLIC GOODS AND PUBLIC GOODS AND MARKET FAILURESMARKET FAILURES
MARKET POWER…THE ABILITY TO UNDULY INFLUENCE MARKET PRICES
LITTLE OR NO COMPETITION…MONOPOLIES
MARKET AWARDS THOSE ACCORDING TO ABILITY TO PRODUCE
PRODUCTIVITY/STANDARD PRODUCTIVITY/STANDARD OF LIVINGOF LIVING
STANDARD OF LIVING: QUALTIY OF LIFE MEASURED BY MATERIAL POSSESIONS
PRODUCTIVITY: AMOUNT OF GOODS AND SERVICES PRODUCED PER HOUR
DIRECT RELATIONSHIP
PRODUCTIVITY/STANDARD PRODUCTIVITY/STANDARD OF LIVINGOF LIVING
UNITED STATES $29,000
MEXICO $8,000
NIGERIA $900
PRODUCTIVITY/STANDARD PRODUCTIVITY/STANDARD OF LIVINGOF LIVING
REMEMBER THE RULE OF 72!!!ALL ABOUT PRODUCTIVITY
– INVESTMENT NEEDED CAPTIAL TECHNOLOGY EDUCATION
HISTORICAL, PERSONAL OR NATIONAL COMPARISONS
PRODUCTIVITY/STANDARD PRODUCTIVITY/STANDARD OF LIVINGOF LIVING
IMPACT OF GOVERNMENT DEFICIT– DEFICIT: AMOUNT BY WHICH
EXPENDITURES EXCEED REVENUE (YEAR TO YEAR)
– DEBT: CUMULATIVE EFFECT OF PAST DEFICITS (OVER TIME)
DEBATE OVER IMPACT
PRODUCTIVITY/STANDARD PRODUCTIVITY/STANDARD OF LIVINGOF LIVING
GOVERNMENT DEFICITS LEAD TO CROWDING OUT
HIGHER INTEREST RATES FOR ALL
LESS INVESTMENT IN HUMAN AND PHYSICAL CAPITAL
CUTTING TAXES WILL SPUR MORE GROWTH…MORE INCENTIVES
MORE GROWTH MEANS MORE REVENUE
GROW OUT OF THE DEFICIT
PRODUCTIVITY/STANDARD PRODUCTIVITY/STANDARD OF LIVINGOF LIVING
IF DEFICITS DO “CROWD OUT”– LOWER INVESTMENT TODAY MEANS
LOWER PRODUCTIVITY TOMORROW
DO DEFICITS LEAD TO LOWER STANDARDS OF LIVING IN THE LONG RUN???
UNEMPLOYMENT VS UNEMPLOYMENT VS INFLATIONINFLATION
TWO MAJOR PROBLEMS IN MACROECONOMY
TRADEOFF IN THE SHORT RUNPHILLIPS CURVE
U
I
UNEMPLOYMENT VS UNEMPLOYMENT VS INFLATIONINFLATION
PUBLIC POLICY– FISCAL POLICY
TAX AND/OR SPEND– MONETARY POLICY
CONTROL OF MONEY SUPPLY
LENDERS HURT BY LENDERS HURT BY INFLATIONINFLATION
INFLATION…GENERAL RISE IN PRICE LEVELS
VALUE OF DOLLAR DECREASESIF UNEXPECTED WITH A FIXED
INTEREST RATE THEN LENDERS GET PAID BACK IN CHEAPER DOLLARS
INTEREST RATES GUIDE INTEREST RATES GUIDE THE ECONOMYTHE ECONOMY
INTEREST RATES…PRICE OF BORROWING MONEY
SAVINGS RATE VS BORROWING RATE
FEDERAL RESERVE BOARD CONTROLS MONEY SUPPLY
INTEREST RATES GUIDE INTEREST RATES GUIDE ECONOMYECONOMY
MORE MONEY LOWER RATES MORE
BORROWING MORE SPENDING ECONOMY HEATS
UP
LESS MONEY HIGHER RATES LESS BORROWING LESS SPENDING ECONOMY SLOWS
DOWN
INVESTMENT IS NEEDED INVESTMENT IS NEEDED FOR GROWTHFOR GROWTH
NO PAIN NO GAININVESTMENT OF TIME MONEY OR
RESOURCES NEEDED FOR GROWTHCAPITAL GOODSTECHNOLOGYHUMAN CAPITAL/EDUCATION