Today n Continue our introduction to economics. n Conclude Ch. 1 and Begin Ch. 2.

Today

Continue our introduction to economics. Conclude Ch. 1 and Begin Ch. 2

The Economic Way of Thinking

A Special Way of Looking at the World

People Act with Rational Self-Interest Rational: consistent with one’s goals,

taking all relevant information into account. Self-interest: One’s self interest may

include altruism.

Consider All Costs

Ex: What is the cost of going to a movie? Explicit cost: the money spent on tickets,

popcorn, gas, etc. Implicit cost: the value of time--what was

the next best use of your time, and how much was that worth?

Consider All Costs, Cont’d.

Opportunity Cost: The total implicit & explicit cost of an activity.

SAME AS: the value of the resources used in their next best alternatives.

Marginal Decision-Making

Most of our choices are about how much to buy or do.

When deciding whether to buy one more, look at the marginal benefit versus the marginal cost.

Prices as Signals

Prices signal the flow of resources into or out of industries.

Ex: High prices for coal lead firms to buy more machinery, hire more workers to mine coal.

Ex: Expectations that a lot of money can be made in dot.com ventures leads people to get education leading to that career path.

Chapter 2

Some Tools of Economic Analysis

Comparative Advantage

A producer has a comparative advantage in making a good if it can do so at a lower opportunity cost than another producer.

Specialization of Labor

When a person has a natural aptitude for doing a task, they can do it for a lower cost.– Ex: soldiers, artists, nurses, talk-show hosts,

computer programmers Specialization of labor makes it more

desirable to make a limited range of goods.

Division of Labor

When a person performs smaller tasks, he can be more productive.– Writing out a punishment– Ford’s assembly line

Division of labor makes it more desirable to make a limited range of goods.

Exchange

We can jointly produce a lot more stuff by specializing and exchanging among ourselves than by being independent.– Ex: Unabomber

Opportunity Cost from a Grand Perspective The world has opportunity costs! Ultimately, it is limited resources that force

us to make choices in what we produce.

Production Possibilities Frontier

Suppose we can lump everything into two types of goods: military or consumer.

In any given year, we are limited in how much labor, capital, and other resources we can use to produce goods & services.

We cannot make unlimited quantities of either type of good.

Production Possibilities Frontier

Shows all of the possible combinations of consumer and military goods that can be produced by an economy in a year.

Drawn for a given quantity of inputs available.

Production Possibilities FrontierProduction Possibilities Frontier

The PPF separates those combs. which can be produced from those that cannot.

Can you interpret each point?

Butter

Guns

A C

D

E

B

Opportunity Cost & the PPFOpportunity Cost & the PPF

The opp. cost of making one more gun is butter foregone.

Butter

Guns

A C

D

F

1 2 3

Opp. Cost & the PPFOpp. Cost & the PPF

The opp. cost of making one more gun is higher, the greater the current output of guns.

A similar statement is true for butter. This leads to a bowed-out PPF.

Opp. Cost & the PPF

Opp. cost rises, because some inputs are more readily used to produce a particular good (ex: land & metal).

As you produce more guns (& less butter) you find that you are forced to make additional guns using mostly add’l land. This is very costly in terms of butter, & doesn’t yield more guns very easily.

Purpose of the PPF

It illustrates our choices. It helps us understand that trade-offs must

be made. It doesn’t help us choose.

Next Time

Continue Ch. 2, Begin Ch. 3. If you need help understanding graphs, then

be sure to study the appendix to Ch. 1!

Group Work

Shifts in the PPF

Instructions

For each of the four scenarios :– Draw an initial PPF. Be sure to label the axes.– Show a new PPF on the same graph that

represents how the PPF will shift for that scenario. Be sure to indicate which is the old PPF and which is the new PPF.

You should have 4 graphs, each with 2 PPFs on it.

PPF of Military & Consumer GoodsPPF of Military & Consumer Goods What would technological progress do? What would a devastating war do to the

PPF? What would more available labor do to the

PPF? What would more available metal do to the

PPF?