Dolan, Economics Combined Version 4e, Ch. 1 Economics Combined version Edwin G. Dolan Best Value Textbooks 4 th edition Chapter 1 The Economic Way of Thinking

Economics Social Science Studies choices made under scarcity Scarcity: When not enough is available for free to satisfy every desired use… Are Oranges in Tulare County Scarce??? Is your time scarce???

Micro vs. Macro Microeconomics – Studies the economy at the level of individual consumers, workers, firms, goods, and markets Macroeconomics – Studies the economy at the aggregate level, at the level of the economy as a whole. – Examines total consumer behavior, total employment, total production, total sales, etc.

Factors of Production Generally 3 Categories: – Natural Resources (old s chool Land….) – Labor (physical and intellectual services of people + [skills called Human Capital] – Capital (plant, machinery, equipment used in production)

Copyright (c) Houghton Mifflin Company. All rights reserved. Opportunity Cost The opportunity cost of a good or service is its cost in terms of the forgone opportunity to pursue the one best possible alternative activity with the same time or resources

Copyright (c) Houghton Mifflin Company. All rights reserved. 6 Your Daily Econ MANTRA Opportunity cost is: The value of the next best option.

Opportunity cost Examples: Opportunity costs for College – The tuition you pay to your college. – The money you could have earned if you spent your time working instead of studying is also part of the opportunity cost of a college education. – The cost of meals that you eat while you are in college is not part of the opportunity cost of a college education, because you would have to eat whether you went to college or not.

Copyright (c) Houghton Mifflin Company. All rights reserved. 8 Comparative Advantage: the ability to produce a good or service at a lower opportunity cost than someone else. Law of comparative advantage: – proposition that the joint output of trading partners will be greatest when each good is produced by the low opportunity cost producer.

Dolan, Economics combined version 4e, Ch. 1 Comparative Advantage Comparative advantage is the ability to do something at a relatively lower opportunity cost than someone else. Who has a comparative advantage in splitting, Kim or Lee? Who has a comparative advantage in stacking, Kim or Lee? Example: Kim can split a cord of wood in 1 hour and stack a cord in 30 min. Lee can split a cord of wood in 2 hours or stack a cord in 30 min.

Copyright (c) Houghton Mifflin Company. All rights reserved. 10 Specialization Economic actors will be better off if they choose to produce those things for which they have the lowest opportunity costs, and trade for those with higher costs. – This is called specialization. Choices based on lowest opportunity costs involve giving up the least amount of other things. Specialization is based on Comparative Advantage! Chalk talk: Tom and Nancy… 40:120 (30)

David Ricardo Established the Theory of Comparative Advantage – Especially in foreign Trade. Expected eventual “steady state” with mass poverty. Paired with Thomas Malthus Economics as the “dismal science” Principles of Political Economy and Taxation, 1817

Copyright (c) Houghton Mifflin Company. All rights reserved. 12 Production Possibilities Frontier Underutilized (Inefficient) Nondefense Goods B1B1 F1F1 C1C1 D1D1 Only nondefense goods produced E1E1 Only defense goods produced A1A1 Efficient Combinations Defense Goods Impossible G1G DefenseNon-defense A1A B1B C1C D1D E1E F1F G1G

Dolan, Economics combined version 4e, Ch. 1 Production Possibility Frontier The slope of the production possibility frontier is equal to the opportunity cost of one good (education) in terms of the other (cars)

Copyright (c) Houghton Mifflin Company. All rights reserved. 14 Marginal Opportunity Cost The marginal opportunity cost is the amount of one good or service that must be given up to obtain one additional unit of another good or service. The slope (absolute value) of the PPC is the opportunity cost of the good on the X axis. The inverse of the slope is the opportunity cost of the good on the Y axis. Reminder: Slope = Rise/Run

Copyright (c) Houghton Mifflin Company. All rights reserved. 15 Marginal Opportunity Cost The PPC bows outward because there are ever-increasing marginal opportunity costs to the production of any good.

Copyright (c) Houghton Mifflin Company. All rights reserved. 16 Marginal Costs To increase its production of nondefense goods, society must give up ever-increasing amounts of defense goods.

1.What is the Opportunity cost of making a Snowboard in Plant 1, Plant 2, and Plant 3? 2.What is the opportunity cost of making a pair of skis in Plant 2, Plant 2, and plant 3? 3.Who makes the cheapest Snowboards? 4.Who makes the cheapest Skiis?

Jeff’s Efficiency Soapbox...

Growth can expand the PPF over time

Economic Efficiency: – State of affairs where it is impossible to make any change that improves satisfaction for one actor without harming the interests or satisfaction of another. Can’t make anyone better off without harming others Can’t make more of one thing without sacrificing some of something else

Key Terms: Positive Economics: Deals with facts and objective realities about relationships and economic realities Normative Economics: Deals with judgments about what choices, policies or options are better or worse – involves value judgments and preferences

Key Terms: Hierarchy: A way of achieving coordination guided by a central authority Spontaneous order: A way of achieving coordination through individuals acting in response to cues and incentives from the environment

Key Terms: Market: Any arrangement people have for trading with each other. Empirical: Based on experience or factual observations

Key Terms: Ceteris Paribus: Latin term used in Economics to mean “all other things held constant. Spontaneous order: A way of achieving coordination through individuals acting in response to cues and incentives from the environment

Basic Graphing for Economics:

Calculate the Slope