Some Tools of the Economist Micro Chapter 2 Some Tools of the Economist

6 Learning Goals Define and recognize examples of opportunity costs (on your own; repeat of Chapter 1) Discern why voluntary trade creates value Realize why property rights are key to economic progress Illustrate the concepts of tradeoffs, opportunity costs, and growth Recognize that specialization and division of labor lead to higher output levels and living standards List society’s three questions and specify the kinds of economic organizations (on your own)

Trade Creates Value

Class Activity: When you buy something, do you actually gain anything more than the item itself? If no, why? If yes, why?

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Q2.1 When voluntary trade occurs, which statement do you believe is most accurate? One person gains value while the other one loses value Both people gain some value Neither people gain value 58

Two opposing views of trade: 1. When people trade, one person gains and the other person loses Referred to as a zero-sum game Video:

Two opposing views of trade: 2. When people trade, both parties gain Wealth is actually created by trade Video:

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Q2.2 (MA) Jack Sparrow values his boat at $4,000, and Hector Barbossa values it at $9,000. If Barbossa buys it from Jack for $7,000, which of the following is true? Barbossa loses $7,000 Barbossa gains $2,000 Barbossa gains $5,000 Barbossa gains $9,000 Jack loses $4,000 Jack loses $7,000 Jack gains $3,000 Jack gains $7,000 60

Voluntary trade creates wealth and promotes economic progress With or without production, with or without money exchanges, voluntary trade is expected to benefit both parties involved. Potential trades: Finished goods exchanged through barter Finished goods exchanged for money Businesses buying resources Consumers buying products

Class Activity: What could reduce the value created from a voluntary transaction? A transaction cost is a monetary or nonmonetary barrier that lowers the benefits of trade Example: surfing the web looking for airline tickets

The Importance of Property Rights

2 Kinds of Property Rights: (1) Common rights – everybody owns it (2) Private rights – only one person owns it

U.S. Constitution Amendment IV The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.

Property rights change the incentives for individuals Clicker question next

Q2.3 When property rights are clearly defined and enforced, private owners will use their property for selfish ends because they have little or no incentive to consider the desires of others. develop and direct their property toward uses that others value highly because the market will generally reward them for doing so. have little or no incentive to take care of their property or conserve it for the future. be unable to derive personal gain if they are sensitive to the desires of others when deciding how to use their property. 60

Property rights change the incentives for individuals Demonstration:

Property rights change the incentives for individuals Video:

Supplemental Video: Stossel- private property and Native Americans (on Blackboard)

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Q2.4. Suppose that in Australia, the government allows private ownership of chickens but not of cows. If the people of Australia permanently increase their desire to purchase more chicken and beef, in the long run, we would expect the population of chickens to rise and the population of cows to fall. the population of cows to rise and the population of chickens to fall. the populations of both chickens and cows to increase. both chickens and cows to become extinct in Australia unless the government places the animals on the endangered species list.

Incentives created by private property rights: Give proper care Conserve for the future Use resources in ways other people value Mitigate possible harm to others

Violating property rights can create undesirable behavior Video:

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Q2.5. ​Where was Madea when her property rights were violated? Target Wal-Mart K Mart Publix

Production Possibilities Curve

PPC also called PP Frontier Graph:

The PPC can shift Graph:

The PPC can shift Shift out: growth, produce more Shift in: shrink, produce less Video illustration of shifting out: A Knight’s Tale

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Q2.6. ​What was the total prize for winning the event? 9 pieces of silver. 13 pieces of silver. 15 pieces of silver. 25 pieces of silver. 2 feathers from the King.

Class Activity: Economics is Everywhere 1.4

A great example of trade-offs comes from the life of a full-time student. Such students can be imagined as having only two uses of their time- studying and socializing- and two outputs from those uses- knowledge acquired and social satisfaction. If a student is efficient, he or she cannot increase the amount of knowledge acquired in college without giving up social satisfaction. The opportunity cost of one more unit of social satisfaction is some amount of forgone knowledge, and the opportunity cost of another unit of knowledge is forgone social satisfaction. This production possibility frontier can shift out along each axis. A speed-reading course moves the curve out along the axis for knowledge acquisition, allowing the student to obtain both more knowledge and more social satisfaction (because some time that can be saved from studying can be shifted to socializing). Q: Draw the production possibility frontier implied in this story. List one other example of a technical improvement that shifts the frontier out the learning axis, and one other that shifts it out the social satisfaction axis.

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Q2.7. Over time, an increase in a nation's stock of physical capital will shift the production possibilities curve inward. cause an economy to operate inside its production possibilities curve. shift the production possibilities curve outward. eliminate the basic economic problem of scarcity.

Trade, Output, and Living Standards

Law of Comparative Advantage Class Activity: Economics is Everywhere 20.2

My wife and I needed to move 40 pieces of fencing, all with nails in them, from behind the house out to the street, and the nails had to be removed before the trash collectors would take the fencing. How to organize the task? There are three activities: dragging the wood, pounding the nails with a hammer so the heads stick up, and pulling the nails out with pliers. We figured that I have an absolute advantage in all three activities, but my wife probably had a comparative advantage in using the hammer. To minimize time spent on the activity, I dragged the wood, she hammered, and I plied. As the morning progressed, we each got faster at our tasks- our production possibility frontiers moved outward. By the end of the task, she may have developed an absolute advantage at hammering, so that our technological improvements increased each of our comparative advantages in the three tasks. Q: Having developed our skills in these tasks, should we now go into business offering our services in removing fencing? Why or why not?

Law of Comparative Advantage Make the good for which you have a low opportunity cost and trade for the good for which you have a high opportunity cost. Translation: make something you’re good at and trade for something you’re not good at. 2 Clicker questions next

Q2.8 According to the law of comparative advantage, both individuals and nations will be able to produce a larger combined output if each productive activity is undertaken by the high opportunity cost producer. the low opportunity cost producer. the producer who is able to hire workers at the lowest wage. the party that can complete the productive activity most rapidly. 60

Q2.9. Thor can produce 10 swords or 20 hammers in one hour while Loki can produce 15 swords or 5 hammers in one hour. Which of the following statements is correct? Loki has a comparative advantage over Thor in the production of hammers. Loki has a comparative advantage over Thor in the production of swords. Thor has a comparative advantage over Loki in the production of swords. Loki and Thor cannot gain from specialization and exchange.

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Q2.10. ​What percent of his income did Vanderbilt give away? 1% 5% 10% 50%

Class Activity: Think of at least two activities for which you think you have a comparative advantage. Why do you have a comparative advantage?

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Importance of Comparative Advantage Low opportunity cost Comparative advantage Specialization Division of labor Voluntary trade Increased wealth

Adam Smith, Wealth of Nations “I have seen a small manufactory of this kind where ten men only were employed, and where some of them consequently performed two or three distinct operations. But though they were very poor, and therefore but indifferently accommodated with the necessary machinery, they could, when they exerted themselves, make among them about twelve pounds of pins in a day. There are in a pound upwards of four thousand pins of a middling size. Those ten persons, therefore, could make among them upwards of forty-eight thousand pins in a day. But if they had all wrought separately and independently, and without any of them having been education to this peculiar business, they certainly could not each of them have made twenty, perhaps not one pin in a day.”

Self-sufficiency is the quickest and most absolute path to poverty

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Q2.11 When voluntary trade occurs, which statement is most accurate? One person gains value while the other one loses value Both people gain some value Neither people gain value 60

Economic Organization

List society’s three questions and specify the kinds of economic organizations (on your own) Supplemental video: “Chapter 2-economic organization” on Blackboard

6 Learning Goals Define and recognize examples of opportunity costs (on your own; repeat of Chapter 1) Discern why voluntary trade creates value Realize why property rights are key to economic progress Illustrate the concepts of tradeoffs, opportunity costs, and growth Recognize that specialization and division of labor lead to higher output levels and living standards List society’s three questions and specify the kinds of economic organizations (on your own)