Copyright © 2006 South-Western/Thomson Learning. All rights reserved. ●Education: ♦B.A. in Economics –UCSC ♦M.S. and PhD in Economics –UW Madison ●Background: ♦Bass Lake ●Teaching Experience: ♦ECON 160, 310, and 405, 500 & BUS 302 ●Education: ♦B.A. in Economics –UCSC ♦M.S. and PhD in Economics –UW Madison ●Background: ♦Bass Lake ●Teaching Experience: ♦ECON 160, 310, and 405, 500 & BUS 302 Leah Marcal

Copyright © 2006 South-Western/Thomson Learning. All rights reserved. ●Research: ♦College Assessment Director ■Employer, alumni, and student satisfaction surveys ■Returns to college education ●Interests (before I had twins ): ♦Hiking ♦Texas Hold’em ●Research: ♦College Assessment Director ■Employer, alumni, and student satisfaction surveys ■Returns to college education ●Interests (before I had twins ): ♦Hiking ♦Texas Hold’em Leah Marcal (cont.)

Copyright © 2006 South-Western/Thomson Learning. All rights reserved. ●Name ●Undergraduate Major ●Employment ●Favorite movie ●Name ●Undergraduate Major ●Employment ●Favorite movie Your Introductions:

Copyright © 2006 South-Western/Thomson Learning. All rights reserved. Syllabus ●Preparation: ♦Strong working knowledge of high school algebra and geometry ●Textbook: ♦Baumol and Blinder, Economics: Principles and Policy, 11 th edition (2010) ●Preparation: ♦Strong working knowledge of high school algebra and geometry ●Textbook: ♦Baumol and Blinder, Economics: Principles and Policy, 11 th edition (2010)

Copyright © 2006 South-Western/Thomson Learning. All rights reserved. Syllabus (cont.) ●Review: ♦Class website: ■PPT slides for each lecture ■Answers to selected questions at the end of each chapter ■Online practice quizzes ●Review: ♦Class website: ■PPT slides for each lecture ■Answers to selected questions at the end of each chapter ■Online practice quizzes

Copyright © 2006 South-Western/Thomson Learning. All rights reserved. Syllabus (cont.) ●Assessment: ♦In-class quizzes (10%) ■Drop lowest score ♦Midterm (40%) ♦Final (50%) ■Contain T/F, multiple choice, and essay questions ■No make-up quizzes or exams ●Assessment: ♦In-class quizzes (10%) ■Drop lowest score ♦Midterm (40%) ♦Final (50%) ■Contain T/F, multiple choice, and essay questions ■No make-up quizzes or exams

Copyright © 2006 South-Western/Thomson Learning. All rights reserved. Syllabus (cont.) ●Office Hours: ♦JH 4250 on Tues. from 6:00 to 6:50; or by appointment ♦ your questions: ●Classes: ♦12 meetings: 10 lectures and 2 exams ●Office Hours: ♦JH 4250 on Tues. from 6:00 to 6:50; or by appointment ♦ your questions: ●Classes: ♦12 meetings: 10 lectures and 2 exams

Date Topic Chapter 08/31Scarcity and Cost3 09/04Supply and Demand4 09/07Consumer Demand and Elasticity5 & 6 09/14Production and Cost; Output and Price7 & 8 09/18Perfect Competition10 09/21Midterm--- 09/28Monopoly11 10/05Between Competition and Monopoly12 10/09Macroeconomics and Aggregate Demand22 & 25 10/12 Aggregate Demand and Supply; Fiscal Policy 26, 27, & 28 10/19Money and Monetary Policy29 & 30 10/23Final Exam---

1 1 The Fundamental Economic Problem: Scarcity and Choice

Copyright © 2006 South-Western/Thomson Learning. All rights reserved. Scarcity and Choice ●Central problem in economics: how to chose among competing alternatives given the limited resources of decision makers Decision-makerAlternatives CA state gov.Roads or schools Fed gov.Defense or SSI HouseholdsNew car or trip FirmsPCs or office furniture

Copyright © 2006 South-Western/Thomson Learning. All rights reserved. Scarcity and Choice ●All resources are scarce, so a decision to have more of one thing is a decision to have less of something else. ●Cost of any decision is its opportunity cost – value of the next best alternative that is given up. ●What is the cost of producing one car? ●All resources are scarce, so a decision to have more of one thing is a decision to have less of something else. ●Cost of any decision is its opportunity cost – value of the next best alternative that is given up. ●What is the cost of producing one car?

Copyright © 2006 South-Western/Thomson Learning. All rights reserved. Scarcity and Choice ●Goods are scarce because the resources (land, labor, capital, and fuel) that are used to produce goods are scarce. ●How does society decide whether cars or refrigerators are produced? ♦Forces of S and D ●Goods are scarce because the resources (land, labor, capital, and fuel) that are used to produce goods are scarce. ●How does society decide whether cars or refrigerators are produced? ♦Forces of S and D

●Opportunity cost is closely related to money cost if markets function properly ♦E.g., D for steel → high P for steel → high opportunity cost of car → high P for cars ●No explicit P for some valuable resources – like time ●TC = money cost + opportunity cost ♦E.g., college education ●Opportunity cost is closely related to money cost if markets function properly ♦E.g., D for steel → high P for steel → high opportunity cost of car → high P for cars ●No explicit P for some valuable resources – like time ●TC = money cost + opportunity cost ♦E.g., college education Opportunity Cost and Money Cost Copyright© 2006 South-Western/Thomson Learning. All rights reserved.

Scarcity and Choice for a Single Firm ●Production Possibilities Frontier ♦PPF = graph showing different combinations of output for a fixed number of inputs ♦More of one good  less of another ♦Illustrates opportunity costs in production ●Production Possibilities Frontier ♦PPF = graph showing different combinations of output for a fixed number of inputs ♦More of one good  less of another ♦Illustrates opportunity costs in production

TABLE 1. PPF for a Farmer Copyright© 2006 South-Western/Thomson Learning. All rights reserved.

FIGURE 1. PPF for a Farmer Attainable region Soybeans Wheat E D C B A Unattainable region Copyright© 2006 South-Western/Thomson Learning. All rights reserved.

●Negatively sloped ♦↑ Q wheat by moving resources out of soybean production and into wheat production ●Slope = opportunity cost ●Bowed outward ♦↑ Opportunity cost of wheat as ↑ wheat production ■Why? Inputs tend to be specialized. E.g., some land may be better suited for wheat vs. soybean production. ●Negatively sloped ♦↑ Q wheat by moving resources out of soybean production and into wheat production ●Slope = opportunity cost ●Bowed outward ♦↑ Opportunity cost of wheat as ↑ wheat production ■Why? Inputs tend to be specialized. E.g., some land may be better suited for wheat vs. soybean production. Features of the PPF Copyright© 2006 South-Western/Thomson Learning. All rights reserved.

♦Principle of increasing costs:  production of one good   opportunity cost of producing another unit ♦PPF is bowed outward ♦Reason: inputs tend to be specialized ■If not, then PPF is a straight line ♦Principle of increasing costs:  production of one good   opportunity cost of producing another unit ♦PPF is bowed outward ♦Reason: inputs tend to be specialized ■If not, then PPF is a straight line Principle of Increasing Costs Copyright© 2006 South-Western/Thomson Learning. All rights reserved.

FIGURE 2. PPF without Specialized Resources D C B A Brown Shoes Black Shoes Copyright© 2006 South-Western/Thomson Learning. All rights reserved.

●Straight line PPF: ♦Constant opportunity costs ♦Inputs are not specialized ■Above, inputs used to produce black shoes are equally well suited to produce brown shoes ●Straight line PPF: ♦Constant opportunity costs ♦Inputs are not specialized ■Above, inputs used to produce black shoes are equally well suited to produce brown shoes Principle of Increasing Costs Copyright© 2006 South-Western/Thomson Learning. All rights reserved.

●Use PPFs to show scarcity and choice for the entire economy ●PPF for a country depends on: ♦Resources ♦Skills of its labor force ♦Technology ♦Willingness to work ♦Past investments in factories, educ., and research ●Use PPFs to show scarcity and choice for the entire economy ●PPF for a country depends on: ♦Resources ♦Skills of its labor force ♦Technology ♦Willingness to work ♦Past investments in factories, educ., and research Scarcity and Choice for the Entire Society

FIGURE 3. PPF for Entire Economy Thousands of Automobiles per Year Missiles per Year C F E D B Copyright© 2006 South-Western/Thomson Learning. All rights reserved.

Scarcity and Choice for the Entire Society ●B → D: give up 150,000 cars to get 300 missiles. ●F → C: give up 200,000 cars to get 50 missiles. ●↑ Opportunity cost of military strength as more resources that are suited for car prod. are forced into missile prod. ●B → D: give up 150,000 cars to get 300 missiles. ●F → C: give up 200,000 cars to get 50 missiles. ●↑ Opportunity cost of military strength as more resources that are suited for car prod. are forced into missile prod.

Copyright © 2006 South-Western/Thomson Learning. All rights reserved. Economic Growth ●↑resources or technology shifts the PPF outward ●Factors that promote growth: ♦↑ labor skills ♦Technological advances ♦Investments in K –robots, computers, and factories ●Grow faster by investing in educ., R&D, and new factories and equipment ●↑resources or technology shifts the PPF outward ●Factors that promote growth: ♦↑ labor skills ♦Technological advances ♦Investments in K –robots, computers, and factories ●Grow faster by investing in educ., R&D, and new factories and equipment

Copyright © 2006 South-Western/Thomson Learning. All rights reserved. Economic Growth ●Resources can be used to produce C goods or K goods ♦E.g., steel used to produce cars instead of assembly lines; workers used to produce clothing instead of attending school. ●Investment in K goods shifts out the PPF ●What is the cost of economic growth? ●Resources can be used to produce C goods or K goods ♦E.g., steel used to produce cars instead of assembly lines; workers used to produce clothing instead of attending school. ●Investment in K goods shifts out the PPF ●What is the cost of economic growth?

Figure 4. Growth in the U.S. and Asia F F G G Capital Goods (a) United States This year’s production possibilities Next year’s production possibilities g g f f Capital Goods (b) Asia Next year’s production possibilities A B Consumption Goods N This year’s production possibilities Copyright© 2006 South-Western/Thomson Learning. All rights reserved.

Efficiency ●Efficiency = no waste ●Economy produces max. output using available resources ●Efficiency and the PPF ♦Any point on the boundary is efficient ■Efficiency does not indicate which point is best ♦Any point on the interior is inefficient ●Efficiency = no waste ●Economy produces max. output using available resources ●Efficiency and the PPF ♦Any point on the boundary is efficient ■Efficiency does not indicate which point is best ♦Any point on the interior is inefficient

FIGURE 5. PPF and Efficiency Thousands of Automobiles per Year Missiles per Year C F E D B A Copyright© 2006 South-Western/Thomson Learning. All rights reserved. Point A is inefficient

Copyright © 2006 South-Western/Thomson Learning. All rights reserved. Efficiency ●Sources of inefficiency: ♦Unemployment ♦Inputs assigned to the wrong task ♦Discrimination ●Sources of inefficiency: ♦Unemployment ♦Inputs assigned to the wrong task ♦Discrimination

Copyright © 2006 South-Western/Thomson Learning. All rights reserved. Three Coordination Tasks of Any Economy 1.How to utilize resources efficiently –get on the boundary of the PPF 2.What combinations of goods to produce – which point on the PPF 3.How much of each good to distribute to each person –who gets what ♦Goals can be accomplished by a central planner or a price system 1.How to utilize resources efficiently –get on the boundary of the PPF 2.What combinations of goods to produce – which point on the PPF 3.How much of each good to distribute to each person –who gets what ♦Goals can be accomplished by a central planner or a price system

Copyright © 2006 South-Western/Thomson Learning. All rights reserved. ●Division of Labor: each person specializes in the production of a particular good or task ●Adam Smith in Wealth of Nations (1776) describes specialization in a pin factory: ♦“One man draws out the wire, another straightens it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires 2 or 3 distinct operations; to whiten the pins is another; it is even a trade by itself to put them into the paper.” ●Division of Labor: each person specializes in the production of a particular good or task ●Adam Smith in Wealth of Nations (1776) describes specialization in a pin factory: ♦“One man draws out the wire, another straightens it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires 2 or 3 distinct operations; to whiten the pins is another; it is even a trade by itself to put them into the paper.” Efficiency in Production

Copyright © 2006 South-Western/Thomson Learning. All rights reserved. Efficiency in Production ●Smith observed that this division of labor increased the productivity of the workers as a whole stating: ■“I have seen a manufacturing plant where 10 men were employed. Those 10 men could make among them upwards of 48,000 pins a day. But if they had all worked separately and independently, they certainly could not each of them have made 20, perhaps not 1 pin in a day.” ●Smith observed that this division of labor increased the productivity of the workers as a whole stating: ■“I have seen a manufacturing plant where 10 men were employed. Those 10 men could make among them upwards of 48,000 pins a day. But if they had all worked separately and independently, they certainly could not each of them have made 20, perhaps not 1 pin in a day.”

Copyright © 2006 South-Western/Thomson Learning. All rights reserved. Efficiency in Production ●Imagine a world without specialization ♦You would have to produce all of your own clothing, food, shelter, and transportation. ●So what should you specialize in? ■Doing what you do best and trading with others ●Imagine a world without specialization ♦You would have to produce all of your own clothing, food, shelter, and transportation. ●So what should you specialize in? ■Doing what you do best and trading with others

Copyright © 2006 South-Western/Thomson Learning. All rights reserved. Efficiency in Production ●Example: a world-class neurosurgeon is the best car mechanic in Los Angeles. ♦Should she repair her own car? ♦What is the opportunity cost of having her spend one hour repairing her car? ●Example: a world-class neurosurgeon is the best car mechanic in Los Angeles. ♦Should she repair her own car? ♦What is the opportunity cost of having her spend one hour repairing her car?

Copyright © 2006 South-Western/Thomson Learning. All rights reserved. Comparative Advantage ●Principle of comparative advantage is illustrated here. ●Neurosurgeon specializes in surgery despite her advantage as a car mechanic because she has an even greater advantage as a surgeon. ●She suffers some loss by letting a lesser skilled mechanic repair her car. Yet, she makes up for that loss by the income gained from surgery. ●Principle of comparative advantage is illustrated here. ●Neurosurgeon specializes in surgery despite her advantage as a car mechanic because she has an even greater advantage as a surgeon. ●She suffers some loss by letting a lesser skilled mechanic repair her car. Yet, she makes up for that loss by the income gained from surgery.

Copyright © 2006 South-Western/Thomson Learning. All rights reserved. Comparative Advantage ●Comparative advantage applies to countries. ●Standard of living in the U.S. would be lower if it tried to produce everything itself. ♦Example: U.S. could produce winter roses and computer software. ♦U.S. is better off specializing in software and buying winter roses from Latin America where the opportunity cost of roses is lower. ●Comparative advantage applies to countries. ●Standard of living in the U.S. would be lower if it tried to produce everything itself. ♦Example: U.S. could produce winter roses and computer software. ♦U.S. is better off specializing in software and buying winter roses from Latin America where the opportunity cost of roses is lower.

Copyright © 2006 South-Western/Thomson Learning. All rights reserved. Voluntary Exchange ●Specialization leads to exchange ♦Prior to industrial revolution, workers produced what they consumed. After, workers who produced shoes needed to trade with others who produced food or clothing. ●Voluntary exchange between 2 parties must make both parties better off. ♦Even though no additional goods are created in the act of trading, welfare of society is improved. Individuals can trade what they have for what they want. ●Specialization leads to exchange ♦Prior to industrial revolution, workers produced what they consumed. After, workers who produced shoes needed to trade with others who produced food or clothing. ●Voluntary exchange between 2 parties must make both parties better off. ♦Even though no additional goods are created in the act of trading, welfare of society is improved. Individuals can trade what they have for what they want.

Copyright © 2006 South-Western/Thomson Learning. All rights reserved. Voluntary Exchange ●Why don’t we trade goods for goods? Why do we need money? ■Search costs ●Recall: focus is efficiency in production. Sidetracked: division of labor and specialization → comparative advantage → exchange ●Firms are also encouraged by the profit motive not to waste inputs → efficiency in production ●Why don’t we trade goods for goods? Why do we need money? ■Search costs ●Recall: focus is efficiency in production. Sidetracked: division of labor and specialization → comparative advantage → exchange ●Firms are also encouraged by the profit motive not to waste inputs → efficiency in production

Copyright © 2006 South-Western/Thomson Learning. All rights reserved. Production Decisions ●Task (2) –which point on the PPF –is accomplished by the forces of S and D. ♦Example: if consumers want more fuel- efficient cars, automakers must produce smaller, more efficient cars. ●Task (2) –which point on the PPF –is accomplished by the forces of S and D. ♦Example: if consumers want more fuel- efficient cars, automakers must produce smaller, more efficient cars.

Copyright © 2006 South-Western/Thomson Learning. All rights reserved. Distribution of Goods ●Task (3) –who gets what –is accomplished by consumers purchasing what they like best given their income. ●Ability to purchase goods is not equally distributed. ♦Highly skilled workers and individuals who own valuable resources can sell their labor or resources at high prices giving them greater incomes. ●Should we redistribute income so that everyone can consume the same amount of goods and services? ●Task (3) –who gets what –is accomplished by consumers purchasing what they like best given their income. ●Ability to purchase goods is not equally distributed. ♦Highly skilled workers and individuals who own valuable resources can sell their labor or resources at high prices giving them greater incomes. ●Should we redistribute income so that everyone can consume the same amount of goods and services?