Chapter 1 What is Economics About

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Chapter 1 What is Economics About
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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

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Economic Growth

• Increase in resources
• Increase in technology
• Shift of PPF outward

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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

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Economic Growth within a PPF Framework
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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?

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Production Possibilities Frontier for Grades
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Production Possibilities Frontier for Grades
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More Hours of Study Shifts the Production
Possibilities Frontier
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EfficiencyAgain

• Produce max amount possible given resources and
  technology
• ON PPF EFFICIENT
• UNDER PPF INEFFICIENT
• OVER PPF NOT POSSIBLE

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Unemployment

• Economy is not producing the maximum output given
  the resources and technology available
• Efficient?
• On, over, or under PPF?

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Efficiency Criterion

• Will alternate arrangements of resources or goods
  make at least one person better off without
  hurting someone else?
• Yes? Inefficient
• No? Efficient

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Efficiency, Inefficiency, and Unemployment
Resources, within a PPF Framework
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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 100what does this
  show??
• Value the 100 less than you value the jacket

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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

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Benefits of Trade

• Compare the consumers 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

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Which makes you better off?

• Increases in Consumer or Producer Surplus?
• Consumer
• Why?
• Price that you pay will be lower

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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

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Costs of Trade

• Transaction costs
• Time and effort needed to search out, negotiate,
  and consummate a trade
• May cause trades to not take place
• Dont know about the good
• Shipping costs are too high
• Dont like to work with salesperson
• Third-party effects
• Impacts of trade on parties not immediately
  involved
• Second hand smoke (negative externality)