1. What is Economics?!

2. Scarcity Limited Resources Also called Factors of Production
Unlimited Wants Goods and services Can change over time
Limited Resources Also called Factors of Production

3. Scarcity and Choice
Resources can only be used for one purpose at a time Choices must be made!
The cost of any good, service or activity is the value of what must be given up to obtain it.
There is no such thing as a free lunch!

4. For Example… Joe has the choice of purchasing two shirts.
If both shirts are essentially the same, and he doesn’t really have a preference, which shirt will he choose?
Shirt A $15
Shirt B $20

5. Joe will choose A!! But why?

6. But, opportunity cost does not always refer to money…
The value of something can be subjective
The value of that item may not be measurable!

7. Rational Behavior Human Behavior reflects “rational self interest”
We tend to pursue opportunities that increase our utility.
Rational decision making is different for everyone and in different situations.
Not the same as being selfish!

8. Ceteris Paribus
“Other things equal” – In order to judge the effect of one variable it is necessary to hold other contributing factors constant.

9. Specific economic units. products and resources
ECONOMICS
MACRO
The economy as a whole.
*Total Output
*Employment
*Income/Wealth
Distribution
*Aggregate
Expenditures
*General Price
Level
MICRO
Specific economic units.
*Individual industry
firm or household
*Prices of specific
products and resources

10. Problems! Biases or preconceptions Loaded Terminology Definitions
Fallacy of Composition – what is true for one is true for all
Post Hoc Fallacy – “after this, because of this”
Correlation vs. Causation – Events may be related without a causal relationship. (Income and education)

11. Factors of Production Land – Natural resources, “Gifts from nature”
Labor – physical and mental
talents of individuals

12. Factors of Production
Capital – tools, machinery, and equipment used to make goods and services NOT MONEY!
Consumer goods – intended for final use by consumers
Investment – purchasing capital
Entrepreneurship – someone who starts their own business, invents a product, or changes a production process

13. Full Employment VS Full Production
Full employment requires all resources are employed. Must be willing and able. Full production uses all resources efficiently (max output). The right goods in the right way.

14. Two types of efficiency
Productive – production of goods and services in the least costly way.
Allocative – goods and service most wanted by society. (bathing suits in Alaska vs. ski equipment in Florida)
a. Requires productive efficiency

15. Production Possibilities Curve
Illustrates scarcity and helps to determine opportunity cost.
A graphical representation of all possible combinations of quantities of goods and services that can be produced using existing resources.

16. We must assume: Full employment and productive efficiency
2. Fixed resources.
3. Fixed technology
4. Two goods only

17. Production Possibilities Curve
Computers A
All computers, no globes E
Not possible with the current amount of resources B
Some computers and some globes D
Possible, but some resources are unemployed
All globes, no computers C
Globes

18. Law of increasing opportunity cost
Increased production of one product results in a decreased production of the other, at an increasing rate.

19. Shift vs. Movement Movement – from one point to another.
Caused by increasing production of one good and giving up another
Movement – from one point to another.

20. Shift vs. Movement A complete relocation of the curve.
Shift – complete relocation of the entire curve.

21. Causes Shifts of the PPC
Change in the amount or capability of the resources
Change in the amount or size/capacity of capital goods.
New or obsolete technology

22. Absolute and Comparative Advantage

23. Why do countries trade? Lack of goods Need for raw materials
Specialization
Produce the things they do the best
Exports vs. imports
Exotic products
Profit

24. Is there a way to operate outside the curve without increasing resources?

25. YES!!
Specialization allows countries to make one product and trade with another.
How do we decide who makes what?
Absolute advantage OR
Comparative advantage

26. Absolute Advantage
Who can absolutely make more with their available resources? United States Great Britain Who can make more Guns? Who can make more Butter?
GUNS
BUTTER
1 million
700,000
30,000
500,000
GUNS
BUTTER
80,000
40,000

27. But is that what they should make?
Not necessarily…
Comparative Advantage – Who can produce the item with the least opportunity cost?
Which is better?

28. COMPARATIVE ADVANTAGE!

29. Calculating Comparative Advantage
United States Great Britain
Set up ratios of the two end points.
Reduce ratios to 1: X
Identify who has the lowest “cost” to make one unit.
GUNS
BUTTER
1 million
700,000
30,000
500,000
GUNS
BUTTER
80,000
40,000

30. Comparative Advantage?
Who should produce Guns?
United States!
Why?
Who should produce Butter?
Great Britain!

31. Why shouldn’t both produce Guns and Butter?
Because that is STUPID! Specialization and trade allows for more of everything to be produced.

32. What makes trade better???#
Produced
Traded
Able to Keep
Has if no trade
# Gained from trade
US – 1 m
-100,000
900,000
700,000
200,000
US – 0
+35,000
35,000
30,000
5,000
GB – 0
+100,000
100,000
40,000
60,000
GB – 80K
-35,000
45,000

33. Sources of Comparative Advantage
Investments in Technology
Availability of key inputs
Government services/regulations
Public education
Transportation and communication infrastructure
Safety laws and environmental standards.

34. Practice Problem Cheese Bread Germany 3 12 France 2 4
Who has absolute advantage in cheese?
Who has absolute advantage in bread?
Who has comparative advantage in cheese?
Who has comparative advantage in bread?

35. Input vs. Output Problems
Output problems involve determining how much can be produced with a set amount of resources.
Input problems require you to examine how many units of an resource is required to make one unit of output.

36. Example of an input problem
Mow a Lawn
Trim a Bush Ty
60 min
30 min
Jess
45 min
90 min
Remember that having absolute and comparative advantage requires that you be able to do more, better and/or faster.

37. Example, continued: Mow a Lawn Trim a Bush Ty 60 min 30 min Jess
Who has absolute advantage in mowing?
Who has absolute advantage in trimming? Ty Ty
But how to we find comparative advantage when the bigger numbers are actually bad?

38. How to solve output problems:
Mow a Lawn
Trim a Bush Ty
60 min
30 min
Jess
45 min
90 min
Method 1: Unit Conversion
Examine the numbers in the table to find a common multiple or time period.
For our example we can use 180 minutes.

39. Mow a Lawn
Trim a Bush Ty
60 min
30 min
Jess
45 min
90 min
Now we convert the inputs to outputs.
How many lawns can Ty mow in 180 minutes if it taken him 60 min to mow one? 3
You convert the rest!

40. Now our table looks like this…
Mow a Lawn
Trim a Bush Ty 3 6
Jess 4 2
Now solve it they way you learned last class.
Jess – 4:2
1:1/2
Should make…
Ty = 3:6
1:2
Should make…

41. So… Who has absolute advantage in mowing?
Jess
Who has absolute advantage in trimming? Ty
Who has comparative advantage in mowing?
Who has comparative advantage in trimming?

42. In conclusion…
Specialization and trade can lead to more goods being produced and less waste in the production process.