Economics 211 Principles of Microeconomics Dr. Greg Delemeester

Economics  Making choices under conditions of scarcity How many hours should I study for biology? What stocks should I buy for my portfolio? How many cars should I steal? How many job interviews should I go on?  Making choices under conditions of scarcity How many hours should I study for biology? What stocks should I buy for my portfolio? How many cars should I steal? How many job interviews should I go on?

 What Do Schoolteachers and Sumo Wrestlers Have in Common?  How Is the Ku Klux Klan Like a Group of Real-Estate Agents?  Why Do Drug Dealers Still Live with Their Moms?  Where Have All the Criminals Gone?  What Makes a Perfect Parent?  Would a Roshanda by Any Other Name Smell as Sweet?  Increasing Residual Wage Inequality: Composition Effects, Noisy Data, or Rising Demand for Skill?  Medium-Term Business Cycles  Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle?  Media Frenzies in Markets for Financial Information  An Efficient Dynamic Auction for Heterogeneous Commodities  Paying Not to Go to the Gym

Economic Fundamentals  Self Interest Rationality Maximizing behavior Responding to incentives

Best Undergrad College Degrees by Salary MajorStarting Median SalaryMid-Career Median Salary Chemical Engineering$65,700$107,000 Economics$50,200$101,000 Physics$51,100$98,800 Math$47,000$93,600 Physician Assistant$74,300$91,700 Finance$48,500$89,400 MIS$51,900$87,200 Chemistry$42,900$82,300 Marketing$41,500$81,500 Accounting$46,500$77,600 Political Science$41,300$77,300 Management$42,900$73,000 History$38,800$70,000 English$37,800$66,900 Journalism$36,300$65,300 Psychology$36,000$61,000 Source:

Mini Experiment  “There are no $5 bills laying on the ground.”  Incentives Matter!

Economic Fundamentals  Self Interest Rationality Maximizing behavior Responding to incentives  TANSTAAFL Scarcity  Choices  Opportunity costs There Ain’t No Such Thing As A Free Lunch There Ain’t No Such Thing As A Free Lunch

Economic Fundamentals  Self Interest Rationality Maximizing behavior Responding to incentives  TANSTAAFL Scarcity  Opportunity costs  Marginal Analysis Behavior is modeled as if decisions were based on costs and benefits at the margin

William installs custom sound systems in cars. If he installs 7 per day, his total costs are $300. If he installs 8 per day, his total costs are $400. William will install only 8 sound systems per day if the 8th customer is willing to pay at least: $50 2.$100 3.$300 4.$400 1.$50 2.$100 3.$300 4.$400

Space Mountain (Problem Set 1, #9) You have waited 30 minutes in a line for the Space Mountain ride at Disneyworld. You see a sign that says, "From this point on your wait is 45 minutes." You must decide whether to continue in line or to move elsewhere. On what basis do you make the decision? Do the 30 minutes you've already stood in line come into play? Marginal Analysis ignores sunk costs!

Economic Fundamentals  Unintended Consequences CAFE standards  27.5 MPG fleet average  Objective: Save energy + clean environment  Lighter + smaller cars = more dangerous cars ?  National Academy of Sciences: 1300 to 2600 extra highway deaths each year  Modes of Analysis Positive Analysis Normative Analysis

AverageActual 1. What is the current federal hourly minimum wage rate? 2. What is the average hourly wage rate in the United States? 3. If the price of gasoline rises by 10%, by how much would your gasoline purchases change? 4. Should the minimum wage rate be raised to $10 per hour? 5. Should marijuana be legalized? 6. Should the US adopt a single-payer national health system? 7. All government barriers to free international trade should be ended. 8. Solve the following equation for x: 3x + 40 = x Results of Survey

Economic Model of Crime  Decision Rule If MB > MC  steal another car  Assumptions Resale value on car = $40,000 Income = $20,000 Jail term = 5 years Probability of Arrest = 20% Probability of Conviction = 90% MB = $40,000 MC = (5)($20,000)(.20)(.90)= $18,000 Steal the car!

 Policy Implications [How to deter crime?] Increase jail sentence Increase probability of arrest Increase probability of conviction Increase income Economic Model of Crime

Which of the following will cause property crime to increase? a)An increase in jail terms. b)A decrease in personal incomes. c)An increase in the probability of arrest. d)A decrease in the expected benefit. a)An increase in jail terms. b)A decrease in personal incomes. c)An increase in the probability of arrest. d)A decrease in the expected benefit

Guns Sold (Millions) Gun-Related Murders (Thousands)

Applications (#3, Problem Set 1) A few years ago, Tina ranked three available options as follows: 1st Choice: pay $21,000 tuition and finish a Master's degree in fine arts at the Ohio State University. 2nd Choice: earn $19,000 working part-time managing a small local theater and spend her spare time pursuing her theater hobby as a volunteer director of small-theater plays. 3rd Choice: earn $44,000 working full-time reviewing yellow page advertisements for Verizon.

a)$19,000 b)$21,000 c)$65,000 d)$84,000 What is the minimum value of Tina’s opportunity cost for pursuing her first choice? 1st Choice: pay $21,000 tuition and finish a Master's degree in fine arts at the Ohio State University. 2nd Choice: earn $19,000 working part- time managing a small local theater and spend her spare time pursuing her theater hobby as a volunteer director of small-theater plays. 3rd Choice: earn $44,000 working full- time reviewing yellow page advertisements for Verizon

(#4, Problem Set 1) The acres of grass surrounding the Taj Mahal in Agra, India, are often cut by young women who slice off handfuls with short kitchen blades. Is this a low- or high-cost way to keep a lawn mowed?

Maximizing the Net Benefits from Pizza

Rational Behavior: Continue an activity until MB = MC MC MB TB TC

Production Possibilities Frontier  Shows tradeoffs facing an economy that produces two goods  Assumptions Resources are fixed  Land  Labor  Capital  Entrepreneurship Technology is fixed Beer Cars A B C D E Unattainable Inefficient

Beer Cars A B C D Δ Beer - Δ Cars Slope of PPF = - Δ Cars / Δ Beer Concave PPF implies “law of increasing opportunity cost” (measures the Opportunity Cost)

 Shifts in the PPF are due to: Change in resources Change in technology  Shifts in the PPF are due to: Change in resources Change in technology PPF and Economic Growth Economic Growth requires an expanding PPF

 Examples Cars v. Beer: more efficient brewing process Houses v. Computers: immigration Jazz v. Shrimp: Hurricane Katrina Food v. Electronics: China’s Cultural Revolution Production Possibilities Frontier

Consider the PPF depicted below. A reduction in the amount of unemployment could be described as the movement from: a)A to B b)B to D c)D to C d)B to E a)A to B b)B to D c)D to C d)B to E 12345

Consider the PPF depicted below. A reduction in the amount of unemployment could be described as the movement from: a)A to B b)B to D c)D to C d)B to E a)A to B b)B to D c)D to C d)B to E 12345

 All societies must answer basic questions: What will be produced? How will it be produced? For whom will it be produced?  Allocation Mechanisms Tradition Plan Market Choices, choices, choices…

Alternative Definitions* *The following material will not be on the first exam.

Gains From Trade  Trade implies mutually beneficial exchanges Not a zero-sum game!  Comparative Advantage David Ricardo Lowest opportunity cost producer Specialization and trade can allow individuals (and countries) to expand their consumption beyond their PPF constraints  Trade implies mutually beneficial exchanges Not a zero-sum game!  Comparative Advantage David Ricardo Lowest opportunity cost producer Specialization and trade can allow individuals (and countries) to expand their consumption beyond their PPF constraints

Pizza Cars ∆C = 50 ∆C = 25 ∆P = -200 ∆P = -300 Country A Country B Opportunity cost of 1 Car is 4 PizzasOpportunity cost of 1 Car is 12 Pizzas slope = ∆P/ ∆ C = -200/50 = - 4/1 slope = ∆P/ ∆ C = -300/25 = - 12/1 Country A has the comparative advantage in producing cars.

Pizza Cars Country A Pizza Cars Country B No TradeWith Trade PizzaCarsPizzaCars A B World Production

Questions from the Problem Set

No TradeWith Trade ComputersWineComputersWine Germany Belgium World Belgium Germany Germany trades 3W for 9C ΔW = - 3 ΔC = 9 Belgium: 1W : 5CGermany: 1W : 2C Belgium: 1C : 1/5WGermany: 1C : 1/2W