“There is no such thing as a free lunch.” Bell Ringer “There is no such thing as a free lunch.” Do you agree with statement? Why or why not?

Limits, Alternatives, and Choices Chapter 1

The Economic Perspective Everything we come into contact with is scarce meaning there is a finite amount of it It’s often difficult for us to believe this because so many things are readily available to us (particularly in the United States) Is it possible to run out of water?...trees?...air?...oil? Can you run out of money? Can our Gov’t run out of money? Can you run out of time? In the long run, everything including money, air, and time is finite or scarce.

The Economic Perspective If all things are scarce then we have choices to make about how we use our time, money, and our natural resources. The choices that we have to make are called trade offs opportunity costs— what did we have to give up to make the decision that we made? For example: The football game will cost $5, or you could put $5 of gas in your car, or you can save the $5 to buy something. What is your opportunity cost?

The Economic Perspective When discussing economics we are assuming certain things We are dealing with “rational” people People are self-interested/self-motivated Self-interested and selfish are not the same thing—you raising prices to make your company profitable does not mean you are only focused on yourself. Remember that in most cases the person can refuse to purchase the service/good or get it elsewhere.

The Economic Perspective Marginal in economics means extra, additional, or a change in. Thus, marginal cost is how much more will it cost you to do an extra year of school, study another hour for an exam, or buy another pair of shoes Marginal benefit is how much more will you benefit from purchasing the shoes, going to school, or studying Economists argue that you should never engage in an activity where the marginal cost is higher than the marginal benefit. If buying another pair of shoes simply adds to your shoe collection but does not have any real benefit, then you are better off using your money & time in some other fashion On the other hand, if studying for that test an extra hour will produce a higher grade on the test, it is likely the case that you should spend the time to study again

Theories, Principles, and Models How do economists tests their ideas? The same way any other scientist does—with the scientific method Observe Hypothesize Looking at outcomes compared to hypotheses Accept, reject, and modify hypothesis In order to create economic principles, statements that enable predictions of probable effects of certain actions, we have to make some assumptions

Theories, Principles, and Models Assumption 1: Generalizations When discussing these concepts we are looking at the average customer, average worker, average businesses, or an average nation. There are people who do not fit the model, but most people will. If you want to study what happens in specific scenarios, you will need to take more advanced courses in college  Assumption 2: Ceteris Paribus Ceteris Paribus means “other-things-equal.” In other words if we are looking at the effect of price changes on Pepsi, we’re not concerned with the other outside factors (unless the problem tells you to).

Microeconomics and Macroeconomics Microeconomics: the part of economics that is concerned with decisions made by individuals, workers, households, and businesses They look at individual products or spending in a specific company They look at the sand, the shells, the water, and rocks—not the beach Macroeconomics: the part of economics that looks at the economy as a whole Looking at the nation’s economy or how the nation functions within the global economy They look at the aggregate (adding up all the smaller parts and looking at it as a single unit) They evaluate the beach as a whole, not the rocks, shells, sand, etc.

Positive versus Normative Economics Positive economics focuses on facts, on cause and effect * concerned with objective analysis - what is Normative economics focuses on judgments about what should be done to change/stabilize/maintain the economy * concerned with subjective analysis – what ought to be Which of these is positive, which is normative? The unemployment rate in France is higher than in the United States. The United States should tax wealthy people to help with the deficit.

Scarcity Society has scarce, or limited, resources which fall into four categories Land: all natural resources ( this is NOT real estate!) Labor: any physical or mental ability used by humans to produce something Capital: manufactured aids used to produce stuff (Factory, tractor, money, tools, machinery) Entrepreneurial Ability: the person who takes the initiative and risk to be creative and establish new business Bill Gates, Mark Zuckerberg, Wally Amos

Employment and Efficiency To use our scarce resources wisely we must achieve full employment and full production Full employment means that no one able/willing to work should be without a job and no equipment or land should unused This does take into consideration that land sometimes should lay fallow and some people should not work Full production means that we are using full employment to get the most satisfaction out of those resources

Employment and Efficiency In full production there are two types of efficiency: Productive efficiency—looks at producing any goods/services at the best price Allocative efficiency—looks at producing the right mix of goods/services that are wanted by society Does no good getting maximum efficiency in the production of bathing suits in Boston in November – consumers looking for winter apparel

Employment and Efficiency Because we have unlimited wants with limited resources, we have to make choices Those choices are best explained with a Production Possibilities Model When using this model we assume: We are at full employment productive efficiency We have fixed resources (ex: the land could be used for a factory site or for farming, no other choices) Technology does not change during our analysis We are only focusing on two goods (today’s example will be pizza and/or robots)

Employment and Efficiency We will start with creating a production possibilities table This is usually a standard XY table that gives the various options of using your resources After creating this table, you must put it in graph form Pizzas (In hundred thousands) Robots (in thousands) 10 1 9 2 7 3 4

Employment and Efficiency Q Robots (thousands) Pizzas (hundred thousands) 14 13 12 11 10 9 8 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8 Anything on this side of the PPC (frontier) is unattainable Any spot on the PPC is both attainable and efficient Anything in the shaded area is attainable, but inefficient

Employment and Efficiency By looking at this chart we can see that more pizzas mean fewer robots and vice versa The opportunity cost of moving from A to B is 1000 robots If we move from B to C our marginal cost is 2000 robots Our total cost in that same move is 3000 robots When the marginal cost Increases each time you move up it illustrates the Law of Increasing Opportunity Cost Pizzas (In hundred thousands) Robots (in thousands) 0 (A) 10 1 (B) 9 2 (C) 7 3 (D) 4 4 (E)

Employment and Efficiency Why do you have to sacrifice more robots in order to make additional pizzas? Because as you use up the best resources to make pizzas you will have to start using resources that would best be used to make robots EX: Kansas is great for wheat production and Silicon Valley is great for producing technology As you use up the land in KA you will have to start taking away from the land in CA which sacrifices additional units of robots

Unemployment, Growth, and the Future Q Robots (thousands) Pizzas (hundred thousands) 14 13 12 11 10 9 8 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8 Does “X” represent unemployment or full-employment? Unemployment, because we are not using all of our resources efficiently X

Unemployment, Growth, and the Future Whenever new resources or technology becomes available the PPC will shift to the right because the producer can now make larger quantities of both products B moves to B’; C moves to C’, etc. Such a shift of the PPC results in economic growth (aka more total output) No need to sacrifice one good for the other if new resources can allow you to make more of both Q Robots (thousands) Pizzas (hundred thousands) 14 13 12 11 10 9 8 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8 B’ C’ D’ B C D

Unemployment, Growth, and the Future Sometimes it is useful to purchase products that you could make from other countries International specialization means spending domestic money on foreign goods International trade is the exchange of goods/services on between nations We trade so we can get a better price and thus produce more of something else with the money we saved