Today

1
Today

• Continue our introduction to economics.
• Conclude Ch. 1 and Begin Ch. 2

2
The Economic Way of Thinking

• A Special Way of Looking at the World

3
People Act with Rational Self-Interest

• Rational consistent with ones goals, taking
  all relevant information into account.
• Self-interest Ones self interest may include
  altruism.

4
Consider All Costs

• Ex What is the cost of going to a movie?
• Explicit cost the money spent on tickets,
  popcorn, gas, etc.
• Implicit cost the value of time--what was the
  next best use of your time, and how much was that
  worth?

5
Consider All Costs, Contd.

• Opportunity Cost The total implicit explicit
  cost of an activity.
• SAME AS the value of the resources used in
  their next best alternatives.

6
Marginal Decision-Making

• Most of our choices are about how much to buy or
  do.
• When deciding whether to buy one more, look at
  the marginal benefit versus the marginal cost.

7
Prices as Signals

• Prices signal the flow of resources into or out
  of industries.
• Ex High prices for coal lead firms to buy more
  machinery, hire more workers to mine coal.
• Ex Expectations that a lot of money can be made
  trading on Wall Street leads students to choose
  majors leading to that career path.

8
Chapter 2

• Some Tools of Economic Analysis

9
Comparative Advantage

• A producer has a comparative advantage in making
  a good if it can do so at a lower opportunity
  cost than another producer.

10
Specialization of Labor

• When a person has a natural aptitude for doing a
  task, they can do it for a lower cost.
• Ex soldiers, artists, nurses, talk-show hosts,
  computer programmers
• Specialization of labor makes it more desirable
  to make a limited range of goods.

11
Division of Labor

• When a person performs smaller tasks, he can be
  more productive.
• Writing out a punishment
• Fords assembly line
• Division of labor makes it more desirable to make
  a limited range of goods.

12
Exchange

• We can jointly produce a lot more stuff by
  specializing and exchanging among ourselves than
  by being independent.
• Ex Unabomber

13
Opportunity Cost from a Grand Perspective

• The world has opportunity costs!
• Ultimately, it is limited resources that force us
  to make choices in what we produce.

14
Production Possibilities Frontier

• Suppose we can lump everything into two types of
  goods military or consumer.
• In any given year, we are limited in how much
  labor, capital, and other resources we can use to
  produce goods services.
• We cannot make unlimited quantities of either
  type of good.

15
Production Possibilities Frontier

• Shows all of the possible combinations of
  consumer and military goods that can be produced
  by an economy in a year.
• Drawn for a given quantity of inputs available.

16
Production Possibilities Frontier

• The PPF separates those combs. which can be
  produced from those that cannot.
• Can you interpret each point?

Butter
C
Guns
17
Opportunity Cost the PPF

• The opp. cost of making one more gun is butter
  foregone.

Butter
C
D
F
Guns
1
3
2
18
Opp. Cost the PPF

• The opp. cost of making one more gun is higher,
  the greater the current output of guns.
• A similar statement is true for butter.
• This leads to a bowed-out PPF.

19
Opp. Cost the PPF

• Opp. cost rises, because some inputs are more
  readily used to produce a particular good (ex
  land metal).
• As you produce more guns ( less butter) you find
  that you are forced to make additional guns using
  mostly addl land. This is very costly in terms
  of butter, doesnt yield more guns very easily.

20
Purpose of the PPF

• It illustrates our choices.
• It helps us understand that trade-offs must be
  made.
• It doesnt help us choose.

21
Next Time

• Continue Ch. 2, Begin Ch. 3?
• If you need help understanding graphs, then be
  sure to study the appendix to Ch. 1!

22
Group Work

• Shifts in the PPF

23
PPF of Military Consumer Goods

• What would technological progress do?
• What would a devastating war do to the PPF?
• What would more available labor do to the PPF?
• What would more available metal do to the PPF?