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