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?

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