Economics: a crash course My first attempt at graphing.
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Transcript of Economics: a crash course My first attempt at graphing.
Economics: a crash course
My first attempt at graphing
A Bit of Levity to Start
Economics: The Dismal Science
• A term coined by Victorian economist Thomas Carlyle
• Was coined in reference to two ideas:1. Thomas Malthus’
theory on population
2. The liberation of black slaves in the West Indies
Economics: The Dismal Science• In Occasional Discourse
on the Negro Question he wrote that economics was, “Not a ‘gay science,’ I should say, like some we have heard of; no, a dreary, desolate and, indeed, quite abject and distressing one; what we might call, by way of eminence, the dismal science.”
Economics: The Dismal Science
• In this book Carlyle was arguing for the reintroduction of Slavery into the Indies because he felt the slaves had a higher living and moral standard in slavery than in a free market with the forces of supply and demand
Economics: The Dismal Science
• What does Carlyle’s take on economics tell us about the discipline?
So what is economics?• The study of how to
allocate scarce resources among competing ends
• Ideally economics studies how to make the best choices under conditions of scarcity
• It also assumes rationality
So what is economics?
• Now think of examples of decisions that are made on each of the following levels:– Individual Child– Individual Adult– Business– Government
So what is economics?
• Is there anything that you cannot apply economics to?
• What does utility mean and can we always apply this to our lives?
Macro vs. Microeconomics• Macroeconomics
studies the economy as a whole or aggregates of parts of the economy (consumers, households, businesses)
• Microeconomics studies the individual unit (a person, a household, an industry)
• We will be focusing on macroeconomics
Positive vs. Normative Economics• Positive economics
tries to look at the economy as it is
• Normative economics tries to look at the economy as it should be
• Most disagreement happens within normative economics
Positive vs. Normative Economics• What would be an
example of a positive economics statement about the current economy?
• What would be an example of a normative economics statement about the current economy?
Opportunity Cost
• What do you think this term means?
Opportunity Cost
• What do you think this term means?
• It is the value of the best alternative sacrificed as opposed to what actually takes place
• Examples???
Opportunity Cost
• How do we see an example of opportunity cost in America’s involvement in World War II?
Opportunity Cost
• How do we see an example of opportunity cost in America’s involvement in World War II?
• Guns or Butter
Marginal Analysis of Benefits and Costs
• How do we determine if the opportunity cost is worth it?
• We analyze!!!
• What is the marginal benefit of more guns? What is the marginal cost?
• What is the marginal benefit of more butter? What is the marginal cost?
Marginal Analysis of Benefits and Costs
• Important to remember- most decisions are not all or nothing
• Usually not zero sleep and an A on the test or a full night’s sleep and a zero on the test
• We think around the margins
Quick review
• What is economics the study of?
• How are macro and micro different?
• How are positive and normative different?
• What is an opportunity cost?
• What is a marginal benefit? Marginal cost?
Production Possibilities
• What factors does the production of goods depend upon?
Production Possibilities
• The Factors of Production are:
• Labor- physical and mental effort
• Human Capital- knowledge and skills
• Entrepreneurship- risk taking in pursuit of rewards
• Natural Resources/ Land- anything from nature
• Capital- goods used in the production process
Imagine this scenario:
• You’re starting a business making toy guns and butter
• You can make ten toy guns or 100 sticks of butter or any combination of the two
• Can we graph this situation?
Imagine this scenario:
• Now let’s compare to a real production possibilities curve
Production Possibilities Curve (or Frontier)
What was similar or different about yours?
What accounts for the differences?
What accounts for the differences?
• The Law of Increasing Opportunity Cost: as the production of a good increases, the opportunity cost of producing an additional unit rises
• Look at the difference between B-D and then from D-C
• Why is this the case?
What accounts for the differences?• Resources are not
completely adaptable
• When we shift from B to D, we allocate to butter resources that are more suited to butter production
• When we move from D to C, we allocate to butter resources more suited to gun production
• Think about land in this case
Quick review
• What is economics the study of?
• How are macro and micro different?
• How are positive and normative different?
• What is an opportunity cost?
• What is a marginal benefit? Marginal cost?
• What is the law of increasing opportunity costs? (Why does the product possibilities chart curve instead of going straight?)
Let’s look at the graph further
• What does point A represent?
• What does point X represent?
Let’s look at the graph further
• Point A- under-utilization of resources/ under-employment
• Point X- unattainable
• What assumptions do we have to make before we can make such a graph?
Let’s look at the graph further
• Assumptions:– Full employment– Fixed resources- in
both quantity and quality
– Fixed technology– Two goods- often one
consumer good and one capital good
How do we choose?
• In looking at a curve, how do we know where the optimal level of production is?
How do we choose?
• Optimal allocation:– Compare marginal
cost and marginal benefit
– Making more butter gives us a marginal benefit, but when does the marginal cost exceed that benefit
– MB=MC is desirable
Changing the curve
• How do we get a change in the Production Possibilities Curve?
Changing the curve
• Here’s how:– Unemployment– Increases in resources and
supplies (quantity or quality- e.g. oil)
– New technology (same resources, just utilized better)
• Static economies must choose between two goods
• Growing economies can do both!
Changing the curve
• In the product possibility curve, output 1 is usually consumer goods, output 2 is capital goods
• Focusing on which will lead to greater long term gains?
Homework
• Pages 5-8 in the workbook- we will discuss tomorrow