1. Some Tools of the Economist
Micro Chapter 2
Some Tools of the Economist

3. 6 Learning Goals
Define and recognize examples of opportunity costs (on your own; repeat of Chapter 1)
Discern why voluntary trade creates value
Realize why property rights are key to economic progress
Illustrate the concepts of tradeoffs, opportunity costs, and growth
Recognize that specialization and division of labor lead to higher output levels and living standards
List society’s three questions and specify the kinds of economic organizations (on your own)

4. Trade Creates Value

5. Class Activity: When you buy something, do you actually gain anything more than the item itself? If no, why? If yes, why?

6. Clicker question next

7. Q2.1 When voluntary trade occurs, which statement do you believe is most accurate?
One person gains value while the other one loses value
Both people gain some value
Neither people gain value 58

8. Two opposing views of trade:
1. When people trade, one person gains and the other person loses
Referred to as a zero-sum game
Video:

10. Two opposing views of trade:
2. When people trade, both parties gain
Wealth is actually created by trade
Video:

13. Clicker question next

14. Q2.2 (MA) Jack Sparrow values his boat at $4,000, and Hector Barbossa values it at $9,000. If Barbossa buys it from Jack for $7,000, which of the following is true?
Barbossa loses $7,000
Barbossa gains $2,000
Barbossa gains $5,000
Barbossa gains $9,000
Jack loses $4,000
Jack loses $7,000
Jack gains $3,000
Jack gains $7,000 60

15. Voluntary trade creates wealth and promotes economic progress
With or without production, with or without money exchanges, voluntary trade is expected to benefit both parties involved.
Potential trades:
Finished goods exchanged through barter
Finished goods exchanged for money
Businesses buying resources
Consumers buying products

16. Class Activity: What could reduce the value created from a voluntary transaction?
A transaction cost is a monetary or nonmonetary barrier that lowers the benefits of trade
Example: surfing the web looking for airline tickets

17. The Importance of Property Rights

18. 2 Kinds of Property Rights:
(1) Common rights – everybody owns it
(2) Private rights – only one person owns it

19. U.S. Constitution Amendment IV
The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.

20. Property rights change the incentives for individuals
Clicker question next

21. Q2.3 When property rights are clearly defined and enforced, private owners will
use their property for selfish ends because they have little or no incentive to consider the desires of others.
develop and direct their property toward uses that others value highly because the market will generally reward them for doing so.
have little or no incentive to take care of their property or conserve it for the future.
be unable to derive personal gain if they are sensitive to the desires of others when deciding how to use their property. 60

22. Property rights change the incentives for individuals
Demonstration:

23. Property rights change the incentives for individuals
Video:

25. Supplemental Video: Stossel- private property and Native Americans (on Blackboard)

27. Clicker question next

28. Q2.4. Suppose that in Australia, the government allows private ownership of chickens but not of cows. If the people of Australia permanently increase their desire to purchase more chicken and beef, in the long run, we would expect
the population of chickens to rise and the population of cows to fall.
the population of cows to rise and the population of chickens to fall.
the populations of both chickens and cows to increase.
both chickens and cows to become extinct in Australia unless the government places the animals on the endangered species list.

29. Incentives created by private property rights:
Give proper care
Conserve for the future
Use resources in ways other people value
Mitigate possible harm to others

30. Violating property rights can create undesirable behavior
Video:

32. Extra Credit Clicker question next
(2 points for correct answer, 0 for incorrect)

33. Q2.5. ​Where was Madea when her property rights were violated?
Target
Wal-Mart
K Mart
Publix

34. Production Possibilities Curve

35. PPC also called PP Frontier
Graph:

36. The PPC can shift
Graph:

37. The PPC can shift Shift out: growth, produce more
Shift in: shrink, produce less
Video illustration of shifting out: A Knight’s Tale

39. Extra Credit Clicker question next
(2 points for correct answer, 0 for incorrect)

40. Q2.6. ​What was the total prize for winning the event?
9 pieces of silver.
13 pieces of silver.
15 pieces of silver.
25 pieces of silver.
2 feathers from the King.

41. Class Activity: Economics is Everywhere 1.4

42. A great example of trade-offs comes from the life of a full-time student. Such students can be imagined as having only two uses of their time- studying and socializing- and two outputs from those uses- knowledge acquired and social satisfaction. If a student is efficient, he or she cannot increase the amount of knowledge acquired in college without giving up social satisfaction. The opportunity cost of one more unit of social satisfaction is some amount of forgone knowledge, and the opportunity cost of another unit of knowledge is forgone social satisfaction. This production possibility frontier can shift out along each axis. A speed-reading course moves the curve out along the axis for knowledge acquisition, allowing the student to obtain both more knowledge and more social satisfaction (because some time that can be saved from studying can be shifted to socializing).
Q: Draw the production possibility frontier implied in this story. List one other example of a technical improvement that shifts the frontier out the learning axis, and one other that shifts it out the social satisfaction axis.

44. Clicker question next

45. Q2.7. Over time, an increase in a nation's stock of physical capital will
shift the production possibilities curve inward.
cause an economy to operate inside its production possibilities curve.
shift the production possibilities curve outward.
eliminate the basic economic problem of scarcity.

48. Trade, Output, and Living Standards

49. Law of Comparative Advantage
Class Activity: Economics is Everywhere 20.2

50. My wife and I needed to move 40 pieces of fencing, all with nails in them, from behind the house out to the street, and the nails had to be removed before the trash collectors would take the fencing. How to organize the task? There are three activities: dragging the wood, pounding the nails with a hammer so the heads stick up, and pulling the nails out with pliers. We figured that I have an absolute advantage in all three activities, but my wife probably had a comparative advantage in using the hammer. To minimize time spent on the activity, I dragged the wood, she hammered, and I plied. As the morning progressed, we each got faster at our tasks- our production possibility frontiers moved outward. By the end of the task, she may have developed an absolute advantage at hammering, so that our technological improvements increased each of our comparative advantages in the three tasks.
Q: Having developed our skills in these tasks, should we now go into business offering our services in removing fencing? Why or why not?

51. Law of Comparative Advantage
Make the good for which you have a low opportunity cost and trade for the good for which you have a high opportunity cost.
Translation: make something you’re good at and trade for something you’re not good at.
2 Clicker questions next

52. Q2.8 According to the law of comparative advantage, both individuals and nations will be able to produce a larger combined output if each productive activity is undertaken by
the high opportunity cost producer.
the low opportunity cost producer.
the producer who is able to hire workers at the lowest wage.
the party that can complete the productive activity most rapidly. 60

53. Q2.9. Thor can produce 10 swords or 20 hammers in one hour while Loki can produce 15 swords or 5 hammers in one hour. Which of the following statements is correct?
Loki has a comparative advantage over Thor in the production of hammers.
Loki has a comparative advantage over Thor in the production of swords.
Thor has a comparative advantage over Loki in the production of swords.
Loki and Thor cannot gain from specialization and exchange.

54. Video:

56. Extra Credit Clicker question next
(2 points for correct answer, 0 for incorrect)

57. Q2.10. ​What percent of his income did Vanderbilt give away?1% 5%
10%
50%

58. Class Activity: Think of at least two activities for which you think you have a comparative advantage. Why do you have a comparative advantage?

59. Video:

61. Importance of Comparative Advantage
Low opportunity cost Comparative advantage Specialization Division of labor Voluntary trade Increased wealth

62. Adam Smith, Wealth of Nations
“I have seen a small manufactory of this kind where ten men only were employed, and where some of them consequently performed two or three distinct operations. But though they were very poor, and therefore but indifferently accommodated with the necessary machinery, they could, when they exerted themselves, make among them about twelve pounds of pins in a day. There are in a pound upwards of four thousand pins of a middling size. Those ten persons, therefore, could make among them upwards of forty-eight thousand pins in a day. But if they had all wrought separately and independently, and without any of them having been education to this peculiar business, they certainly could not each of them have made twenty, perhaps not one pin in a day.”

63. Self-sufficiency is the quickest and most absolute path to poverty

64. Clicker question next

65. Q2.11 When voluntary trade occurs, which statement is most accurate?
One person gains value while the other one loses value
Both people gain some value
Neither people gain value 60

66. Economic Organization

67. List society’s three questions and specify the kinds of economic organizations (on your own)
Supplemental video: “Chapter 2-economic organization” on Blackboard

68. 6 Learning Goals
Define and recognize examples of opportunity costs (on your own; repeat of Chapter 1)
Discern why voluntary trade creates value
Realize why property rights are key to economic progress
Illustrate the concepts of tradeoffs, opportunity costs, and growth
Recognize that specialization and division of labor lead to higher output levels and living standards
List society’s three questions and specify the kinds of economic organizations (on your own)