Economics 160 Microeconomic Principles

1
Economics 160Microeconomic Principles

• Chapters 1, 2, and 3
• Department of Economics
• College of Business and Economics
• California State University-Northridge
• Professor Kenneth Ng

Wednesday, May 13, 2015
2
Administrative Details

• Class is open.
• Permission numbers are available at CSUNECON.com

3
What is Science?

• A scientist tries to understand the world in
  which we live.
• To understand means the ability to predict and
  control the world around us.
• The ability to predict and control means the
  ability to make positive statements about the
  world.
• positive statement
• Involves a prediction or statement of fact, i.e.
  a testable hypothesis.
• Takes the form of an if/then statement.
• normative statement
• Involves a value judgment, i.e. something is
  good or bad.
• Physics is a science
• The laws of physics can be used to make
  positive statements about the behavior of the
  physical universe.
• Example of positive statements from physics.

4
Suppose you wanted the make the object ball (7
ball) go into the corner pocket by hitting it
with the cue ball. How would you accomplish this.?
The object ball will move on line through its
center and the point of impact between the cue
ball and the object ball.
5
Where will the cue ball go after impacting the
7-ball (neglecting spin, roll, and friction)?
The cue ball (neglecting spin, roll, and
friction) will travel at a 90 degree angle to the
path of the object ball
6
Where will the cue ball go after impacting the
end rail? If you were betting, would you bet
that the player would run the table?
The angle of incidence (neglecting spin, friction
and the softness of the rail) will equal the
angle of rebound.
7
Does how hard you hit the cue ball change
anything? If you were betting, would you want
clean or dirty balls?
CIT-Collision induced throw
8
A Positive Statement from the Hard Sciences

• Physics-a science
• The laws of physics can be used to make
  positive statements about the behavior of the
  physical universe.
• Proper application of the laws of physics allows
  highly detailed and accurate positive statements
  to be made.
• Economics is a science like physics, chemistry,
  biology etc.
• Economics is concerned with making positive
  statements about human behavior.
• Identical to "hard" sciences except positive
  statements are about human beings rather than
  inanimate objects.

9
Simple Economic Example

• Change punishment for DUI to
• First offence cut off finger.
• Second offence cut off limb.
• Third offence death penalty.
• Positive Statements
• If the law is passed and enforced then
• Drunk driving convictions will decrease (first
  law of demand).
• Entrepreneurs will bring new products to market
  (reallocation of productive resources).
• Examples of new products
• Portable breathalyzers, police scanners, etc.
• New knowledge will be produced
• Example of new knowledge
• If you are pulled over for drunk driving do you
  want a breathalyzer or blood test?
• Economics is a science that tries to understand
  and control human behavior, i.e. make positive
  statements about human beings.
• Economic Theory can make positive statements
  about human behavior as accurate and detailed as
  physics can make about inanimate objects.

10
For Next Week

• Read Chapter 1 in Mankiew.
• Read Chapter 1 in Friedman, Capitalism and
  Freedom.
• Watch video on Aplia.com

11
The World in Which We Live

• Concerns the application of the simplest, most
  powerful, and central of economic principles to
  one of the most intellectually interesting
  questions regarding human behavior.
• One of the most interesting questions facing
  social scientists is why are some societies rich
  and others poor?
• GNP, population, life expectancy data --Some
  basic facts about the world we live in.

12
Comparative International Statistics (1)
The U.S. Japan, and Europe are home to 11.1 of
the worlds population but produce and consume
55 of the world goods and services
Country Population (millions) Percent of World Population GDP (Nominal, Millions of Dollars) Percent of World GDP GDP per Capita (2009) Ratio of US GDP per Capita
World 6,909,000,000   57,843,000   8,372  
World Outside Europe and U.S. 6,141,107,378   26,179,905   4,263  
European Union 329,937,622 4.8 12,475,099 22 37,810 0.82
United States 310,565,000 4.5 14,119,000 24 45,989 1.00
Communist China 1,341,520,000 19.4 4,985,461 9 3,744 0.08
Republic of China (Taiwan) 23,150,923 0.3 379,000 1 18,303 0.40
Japan 127,390,000 1.8 5,068,996 9 39,738 0.86
India 1,192,240,000 17.3 1,310,171 2 1,134 0.02
Germany 81,802,000 1.2 3,330,032 6 40,670 0.88
United Kingdom 61,792,000 0.9 2,174,530 4 35,165 0.76
Russia 141,927,297 2.1 1,231,893 2 8,684 0.19
France 65,447,374 0.9 2,649,390 5 41,051 0.89
Mexico 112,322,757 1.6 874,902 2 8,143 0.18
North Korea 23,991,000 0.3 27,800 0 17,078 0.37
South Korea 48,501,000 0.7 832,512 1 1,200 0.03
Singapore 5,076,700 0.1 182,232 0 36,537 0.79
Hong Kong 7,061,200 0.1 215,355 0 30,863 0.67
Indonesia 237,556,363 3.4 540,277 1 2,349 0.05
Ethoipia 82,812,000 1.2 336,106 1 336 0.01
Uganda 32,797,000 0.5 15,804 0 482 0.01

Source World Bank, 2009 Source World Bank, 2009 Source World Bank, 2009 Source World Bank, 2009 Source World Bank, 2009 Source World Bank, 2009 Source World Bank, 2009
China and India are home to 36.7 of the worlds
population and consume only 11 of the worlds
goods and services
The average communist Chineses income is only 8
of the average Americans
The average Indians income is only 2 of the
average Americans
The world is characterized by huge disparities in
wealth. As social scientists one of the most
interesting features of the human condition that
we would like the understand and control is the
differential creation of wealth.
The average person outside the U.S. and European
Union makes 2.13 an hour and in the poorer
countries like India make about 50 cents.
13
Comparative International Statistics (2)
Country Population (millions) Percent of World Population GDP (Nominal, Millions of Dollars) Percent of World GDP GDP per Capita (2009) Ratio of US GDP per Capita
World 6,909,000,000   57,843,000   8,372  
World Outside Europe and U.S. 6,141,107,378   26,179,905   4,263  
European Union 329,937,622 4.8 12,475,099 22 37,810 0.82
United States 310,565,000 4.5 14,119,000 24 45,989 1.00
Communist China 1,341,520,000 19.4 4,985,461 9 3,744 0.08
Republic of China (Taiwan) 23,150,923 0.3 379,000 1 18,303 0.40
Japan 127,390,000 1.8 5,068,996 9 39,738 0.86
India 1,192,240,000 17.3 1,310,171 2 1,134 0.02
Germany 81,802,000 1.2 3,330,032 6 40,670 0.88
United Kingdom 61,792,000 0.9 2,174,530 4 35,165 0.76
Russia 141,927,297 2.1 1,231,893 2 8,684 0.19
France 65,447,374 0.9 2,649,390 5 41,051 0.89
Mexico 112,322,757 1.6 874,902 2 8,143 0.18
North Korea 23,991,000 0.3 27,800 0 17,078 0.37
South Korea 48,501,000 0.7 832,512 1 1,200 0.03
Singapore 5,076,700 0.1 182,232 0 36,537 0.79
Hong Kong 7,061,200 0.1 215,355 0 30,863 0.67
Indonesia 237,556,363 3.4 540,277 1 2,349 0.05
Ethoipia 82,812,000 1.2 336,106 1 336 0.01
Uganda 32,797,000 0.5 15,804 0 482 0.01

Source World Bank, 2009 Source World Bank, 2009 Source World Bank, 2009 Source World Bank, 2009 Source World Bank, 2009 Source World Bank, 2009 Source World Bank, 2009
Some Interesting Comparisons.
Taiwan vs. Communist China. When the Nationalists
fled to Taiwan, there was little difference
between Taiwan and Mainland China. 60 years
later there is a very large difference between
the standard of living in Taiwan vs. Communist
China. The average Chinese in Taiwan has almost
5 time the income of Chinese in Communist China.
North Korea vs. South Korea. At the end of
World War 2, North and South Korea were identical
in wealth. Today the average South Korean has a
more than 14 times the income of the average
North Korean.
Singapore and Hong Kong Two city states that
have achieved a standard of living comparable to
Europe and only a little below the United States
14
What It Means to Be Poor

• Look at food situation in 3rd world countries. A
  typical 3rd world country has a per capita income
  of 1134. Example India.
• Lifestyle with 1134 of yearly income.
• Can you feed yourself with 1134 per year?
• 21.81 per week.
• What does it cost to provide a completely
  nutritious diet?
• U.N studies show that a person can get the RDA of
  all nutrients for about 6/week.
• Suppose you were sent to Ralphs with 6 and had
  to subsist on whatever you could buy with 6.
• What would you buy and what would your diet
  consist of?
• What about housing, medical care, etc.?

15
Military Expenditures.
Rank Country Military expenditure, 2009 of GDP, 2008
1 United States 663,255,000,000 4.30
  Next 10 Largest 531,682,000,000  
2 China 98,800,000,000 2.00
3 United Kingdom 69,271,000,000 2.50
4 France 67,316,000,000 2.30
5 Russian Federation 61,000,000,000 3.50
6 Germany 48,022,000,000 1.30
7 Japan 46,859,000,000 0.90
8 Saudi Arabia 39,257,000,000 8.20
9 Italy 37,427,000,000 1.70
10 India 36,600,000,000 2.60
11 South Korea 27,130,000,000 2.80
12 Brazil 27,124,000,000 1.50
13 Canada 20,564,000,000 1.30
14 Australia 20,109,000,000 1.80
15 Spain 19,409,000,000 1.20
16 Turkey 19,009,000,000 2.20
17 Israel 14,309,000,000 7.00
18 Greece 13,917,000,000 3.60
19 United Arab Emirates 13,052,000,000a 5.9a
20 Netherlands 12,642,000,000 1.40
U.S. military spending is large compared to GDP
and is enormous compared to other countries.
16
Why China and India Dont Matter Much and What
Journalists Always Get Wrong.
Country Population (millions) GDP (Nominal, Millions of Dollars) GDP per Capita (2009) Social Surplus (millions)
US Europe Japan 767,892,622 31,663,095   31,048,781
European Union 329,937,622 12,475,099 37,810 12,211,149
United States 310,565,000 14,119,000 45,989 13,870,548
Communist China 1,341,520,000 4,985,461 3,744 3,912,245
Republic of China (Taiwan) 23,150,923 379,000 18,303 360,479
Japan 127,390,000 5,068,996 39,738 4,967,084
India 1,192,240,000 1,310,171 1,134 356,379
Russia 141,927,297 1,231,893 8,684 1,118,351
France 65,447,374 2,649,390 41,051 2,597,032
Mexico 112,322,757 874,902 8,143 785,044
South Korea 48,501,000 832,512 1,200 793,711
Singapore 5,076,700 182,232 36,537 178,171
Hong Kong 7,061,200 215,355 30,863 209,706
Indonesia 237,556,363 540,277 2,349 350,232

Notes Required for subsistence 800, Social Surplus is the money available to the population to spend on consumer goods after basic needs are met. Notes Required for subsistence 800, Social Surplus is the money available to the population to spend on consumer goods after basic needs are met. Notes Required for subsistence 800, Social Surplus is the money available to the population to spend on consumer goods after basic needs are met. Notes Required for subsistence 800, Social Surplus is the money available to the population to spend on consumer goods after basic needs are met. Notes Required for subsistence 800, Social Surplus is the money available to the population to spend on consumer goods after basic needs are met.
What matters in determining relevance and
national power is not how many people or total
wealth but how much resources a country has left
over after resources are used to keep everyone
alive
Take the number of people multiply times 800 and
subtract from GDP. What is left is what a
society has to spend on things besides just
subsistence.
In countries with lots of people and low GDP per
capita most resources are used to provide
subsistence and little is left for other things,
i.e. consumer goods, military spending,
education, etc.
17
Monuments to Greatness, Injustice, or Hubris?
Jade Cabbage
18
Leather-trimmed actively ventilated high-comfort
seats are optionally available for the S-Class.
Built into the seat cushions and backrest are a
number of small fans, which draw in air from
underneath the seat. Even if extreme heat has
built up inside the car, this air will be
perceived as agreeable in temperature because it
is slightly below the normal temperature of the
skin. The air is distributed evenly across the
entire surface of the seat via plastic ducts, an
air-permeable fabric and fine perforations in the
leather, in this way continuously transferring
perspiration moisture away from the passengers.
Active seat ventilation can be activated by
pressing a button in the door panel. This
initially engages the highest of three different
speeds, or stages. Three blue LEDs above the
switch indicate the currently engaged speed. In
order to prevent chilling, the ventilation
automatically switches from stage three to stage
two after approximately ten minutes, then after a
further ten minutes switches to stage one.
19
Comparative International Statistics (2007)
Country Population Growth Rate Total Male Female Children Born Per Woman
Japan 127,288,419 -0.14 82.07 78.73 85.59 1.22
United States of America 303,824,646 0.88 78.14 75.29 81.13 2.1
Taiwan 22,920,946 0.24 77.76 74.89 80.89 1.13
Korea, South 49,232,844 0.37 77.42 74 81.1 1.29
Mexico 109,955,400 1.14 75.84 73.05 78.78 2.37
China 1,330,044,605 0.63 73.18 71.37 75.18 1.77
Korea, North 23,479,089 0.73 72.2 69.45 75.08 2
Indonesia 237,512,355 1.18 70.46 67.98 73.07 2.34
India 1,147,995,898 1.58 69.25 66.87 71.9 2.76
World 6,677,563,921 1.16 66.12 64.18 68.2 2.58
Russia 140,702,094 -0.47 65.94 59.19 73.1 1.4
Tanzania 40,213,162 2.07 51.45 50.06 52.88 4.62
Sudan 40,218,455 2.13 50.28 49.38 51.23 4.58
Ethiopia 78,254,090 2.23 49.43 48.26 50.64 4.99
Nigeria 138,283,240 2.38 47.81 47.15 48.5 5.41
Afghanistan 32,738,376 2.63 44.21 44.04 44.39 6.58
South Africa 43,786,115 -0.50 42.37 43.3 41.42 2.11
Communist China is not rich but has a low
fertility rate. Due to the 1 child
policy. Female/male ratio 117100
Results are mirrored in the 2nd standard measure
of economic performance-life expectancy at
birth. Life expectancy at birth vs. age 40. What
are the most dangerous periods of a persons
life? Life expectancy at age 40 in the U.S. is
84. How is this information useful? Lower
standard of living due to perverse income
effect-smoking and unhealthy eating.
20
The world we live in --The U.S. over time.

• U.S. has always been rich
• Most communist countries have not achieved the
  GNP per capita enjoyed by the average American
  living in 1930.
• Many 3rd world countries have not achieved the
  standard of living enjoyed by the average
  American in 1710.

21
Economics attempts to make positive statements
about human behavior.

• The human behavior that constitutes the subject
  of 99 of economic study is the activity of
  voluntary exchange (the operation of the market).
• Of all the varied types of human behavior why
  study voluntary exchange?
• Answering the question why are we rich? is tied
  to understanding the ramifications of
  unrestricted voluntary exchange, a free market or
  capitalist economic system,
• Answering the question why are we rich?
  involves understanding the interaction of simple
  economic concepts of mutually beneficial
  voluntary exchange, comparative advantage,
  specialization in production, and the role of
  price in dividing the gains from trade.
• This interaction is demonstrated in the book
  using production possibility frontier.

22
Comparative Advantage

• A person or country has a comparative advantage
  if it can produce a good at lower opportunity
  cost than others.
• Comparative advantage is just an observation
  about the way the world is just the like the
  world is round or the sun rises in the east.
• Comparative advantage is just the observation
  that the world is characterized by diversity.
• Differences in climate.
• Physical differences between people.
• Etc.

23
The 6-foot-10 Johnson has been celebrated for
having one of the most dominant fastballs in the
game. He regularly approached, and occasionally
exceeded, 100 miles per hour during his prime.
However, his signature pitch is a hard, biting
slider. Johnson has won the Cy Young Award five
times, second only to Roger Clemens' seven.
24
Vasily Ivanovich Alekseyev (Russian ???????
???????? ???????? born January 7, 1942 in
village Pokrovo-Shishkino, Ryazan Oblast) is a
former competitor from the Soviet Union, who may
be considered the greatest super-heavyweight
weightlifter of all time. He set 80 world records
and 81 Soviet records in weightlifting.
25
Specialization

• A person, group of people, country, or society
  specializes in production when it produces more
  of a good in which it has a comparative advantage
  and exchanges it for goods in which it has a
  comparative disadvantage.
• The opposite of self-sufficiency.
• A person, group of people, country, or society
  can enrich themselves collectively and
  individually if they specialize in the production
  of goods in which they have a comparative
  advantage and exchange for goods in which they
  have a comparative disadvantage.

26
Example of the Benefits of Specialization
According to Comparative Advantage and Exchange.

• Consider two individuals, a rancher and a farmer
  who produce two goods, meat and potatoes.
• The table below shows the number of hours it
  takes each individual to produce either good.

Hours Needed to Make 1 pound of Hours Needed to Make 1 pound of Amount Produced in 40 hrs Amount Produced in 40 hrs
Meat Potatoes Meat Potatoes
Farmer 20 hrs./lb 10 hrs./lb 2 lbs. 4 lbs.
Rancher 1 hr./lb. 8 hrs./lb 40 lbs. 5lbs.
27
Self-Sufficiency
The Farmers Production Possibilities Frontier
shows the combination of two goods that can be
produced by a person if he divides his time in
different ways between production of the two
goods and works 40 hrs. a week.
Meat (pounds)
Hours Needed to Make 1 pound of Hours Needed to Make 1 pound of Amount Produced in 40 hrs Amount Produced in 40 hrs
Meat Potatoes Meat Potatoes
Farmer 20 hrs./lb 10 hrs./lb 2 lbs. 4 lbs.
Rancher 1 hr./lb. 8 hrs./lb 40 lbs. 5lbs.
2
At point A, the farmer divides his time evenly
between production of meat and potatoes and
produces 1 lb. of meat and 2 lbs. of potatoes.
A
1
Potatoes (pounds)
2
4
0
28
Self-Sufficiency The Ranchers Production
Possibilities Frontier
Meat (pounds)
Hours Needed to Make 1 pound of Hours Needed to Make 1 pound of Amount Produced in 40 hrs Amount Produced in 40 hrs
Meat Potatoes Meat Potatoes
Farmer 20 hrs./lb 10 hrs./lb 2 lbs. 4 lbs.
Rancher 1 hr./lb. 8 hrs./lb 40 lbs. 5lbs.
40
B
20
At point B, the rancher divides his time evenly
between production of meat and potatoes and
produces 20 lb. of meat and 2 1/2 lbs. of
potatoes.
Potatoes (pounds)
2½
0
5
29
Opportunity Costs and Comparative Advantage
Hours Needed to Make 1 pound of Hours Needed to Make 1 pound of Amount Produced in 40 hrs Amount Produced in 40 hrs
Meat Potatoes Meat Potatoes
Farmer 20 hrs./lb 10 hrs./lb 2 lbs. 4 lbs.
Rancher 1 hr./lb. 8 hrs./lb 40 lbs. 5lbs.

• Does Comparative Advantage exist in this
  situation?
• Opportunity Cost is defined as whatever must be
  given up to obtain an item, i.e. in the time it
  takes to produce one pound of good, how many
  units of the other good could the person produce
  in the same time.
• The OC of meat for the farmer is 2 potatoes.
• The OC of potatoes for the farmer is ½ lb. of
  meat.
• The OC of meat for the rancher is 1/8th of lb.
  of potatoes.
• The OC of potatoes for the rancher is 8 lbs. of
  meat.
• The Rancher has a Comparative Advantage in the
  production of Meat and the Farmer has a CA in
  potato production.

30
The Effect of Specialization According to
Comparative Advantage and Exchange.
Notice that the farmer and rancher are making a
profit selling potatoes and meat, i.e. the
price of potatoes and meat is greater than the
opportunity cost of producing for the person with
a comparative advantage. Notice also that the
price of meat for the buyer is less than the cost
of producing the meat themselves, i.e. the price
of potatoes and meat is less than the opportunity
cost of producing for the person with a
comparative disadvantage. For instance, for the
famer it costs it costs 6 lbs of potatoes to
produce 3 lb. of meat but they can buy 3 lbs. of
meat by giving up 1 lb. of potatoes. For the
farmer, it is cheaper to buy meat than produce
it.
Farmer sells 1 lb. of potatoes for 3 lbs. of
meat.
2. After Specialization according to Comparative
Advantage
1. Before Specialization and Exchange
4. Collective and Individual Enrichment
The Outcome Without Trade The Outcome Without Trade The Outcome With Trade The Outcome With Trade The Outcome With Trade The Outcome With Trade The Gains From Trade The Gains From Trade
What they Produce and Consume What they Produce and Consume What They Produce What They Trade What They Consume What They Consume The Increase in Consumption The Increase in Consumption
Farmer 1 lb. meat Point A O lbs. meat Get 3 lbs. of Meat for 1 lb. of Potatoes 3 lbs. of Meat Point A 2 lbs. Meat A to A
2 lbs. potatoes Point A 4 lbs. Potatoes Get 3 lbs. of Meat for 1 lb. of Potatoes 3 lbs. of Potatoes Point A 1 lb Potatoes A to A
Rancher 20 lbs. meat Point B 24 lbs. Meat Give 3 lbs. of Meat for 1 lb. of Potatoes 21 lbs. of Meat Point B 1 lb. Meat B to B
2 ½ lbs. potatoes Point B 2 lbs. Potatoes Give 3 lbs. of Meat for 1 lb. of Potatoes 3 lbs. of Potates Point B ½ lb. of Potatoes B to B
3. After Exchange
31
The Farmer ,the Rancher and the effects of
Specialization According to Comparative Advantage
and Exchange.

• By specializing in the production of goods in
  which they have a comparative advantage and
  exchanging for goods in which they have a
  comparative disadvantage, the rancher and farmer
  were able to make themselves individually and
  collectively better off.
• Collective Enrichment.
• Considered as a group, the farmer and rancher are
  producing more total output while working the
  same number of hours.
• Before trade 21 lbs. of meat and 4 ½ lbs. of
  potatoes were produced collectively by the farmer
  and the rancher.
• After specialization and exchange according to
  comparative advantage, 24 lbs. of meat and 6 lbs.
  of meat were produced in the same number of
  hours.
• Individual Enrichment.
• The farmer consumes 2 more lbs. of meat and 2
  more lbs of potatoes. Individually, the farmer is
  better off after specialization and exchange.
• The rancher consumes 1 more lbs. of meat and 1/2
  more lbs of potatoes. Individually, the rancher
  is better off after specialization and exchange.
• By specializing according to comparative
  advantage and exchanging, the farmer and rancher
  increased the amount of goods and services
  produced (increased wealth) and divided the
  additional wealth in such a way that both
  received a portion (individual enrichment).
• Not a redistribution of wealth but the creation
  of wealth.
• Increase in wealth is not due to technological
  improvement but is created by a reallocation of
  existing productive resources.

32
House Passes 819B Stimulus Package President
Obama's plan to revive the economy cleared its
first hurdle when House members passed their
version Wednesday on an 819 billion stimulus
package. FOXNews.com Wednesday, January 28, 2009
33
How Trade Creates Wealth Graphical Representation
If the farmer and rancher specialize in the
production of the good in which the have a
comparative advantage and trade for the good in
which they have a comparative disadvantage, they
can enrich themselves collectively and
individually.
Farmers consumption after specialization
according to comparative advantage and
trade. Through specialization and exchange, the
farmer achieves a consumption bundle that is
outside his production possibilities frontier.
34
How Trade Expands Consumption Opportunities for
the Rancher
Ranchers consumption without specialization
according to comparative advantage and trade.
35
The Do Nothing Principle.

• Specialization according to comparative advantage
  will increase wealth collectively and
  individually but what policy will force
  individuals, groups of individuals, countries, or
  societies to specialize and exchange?
• If individuals or countries are left unrestricted
  to pursue their own self interest they will have
  an incentive to specialize according to
  comparative advantage thus making themselves and
  others better off.
• Advantages of a policy of Laizze Faire or
  benefits of a free market or allowing
  unrestricted exchange.
• Best economic policy is usually do nothing.
• Capitalism and Freedom.
• Book by Milton Friedman, Nobel Prize winning
  economist.
• Basic harmony between principles of U.S.
  constitution, the bill of rights, and a market
  economy.

36
Tank Man, or the Unknown Rebel, is the nickname
of an anonymous man who became internationally
famous when he was videotaped and photographed
during the protests at Beijing's Tiananmen Square
on June 5, 1989. Several photographs were taken
of the man, who stood in front of a column of
Chinese Type 59 tanks, preventing their advance.
One of the most widely reproduced versions of the
photograph was taken by Jeff Widener of the
Associated Press from the sixth floor of the
Beijing Hotel, about half a mile (800 meters)
away from the scene, through a 400-millimeter
lens.
37
The Burning Monk Hòa thu?ng Thích Qu?ng Ð?c
born Lâm Van T?c in 1897 died June 11, 1963)
was a Vietnamese Mahayana Buddhist monk who
burned himself to death at a busy Saigon road
intersection on June 11, 1963. Thích Qu?ng Ð?c
was protesting the persecution of Buddhists by
South Vietnam's Ngô Ðình Di?m administration.
Photos of his self-immolation were circulated
widely across the world and brought attention to
the policies of the Di?m regime. Malcolm Browne
won a Pulitzer Prize for his iconic photo of the
monk's death, as did David Halberstam for his
written account.
38
A Second Example of the Benefits of
Specialization According to Comparative Advantage
and Exchange.
Original Example Original Example Original Example Original Example Original Example
Hours Needed to Make 1 pound of Hours Needed to Make 1 pound of Amount Produced in 40 hrs Amount Produced in 40 hrs
Meat Potatoes Meat Potatoes
Farmer 20 hrs./lb 10 hrs./lb 2 lbs. 4 lbs.
Rancher 1 hr./lb. 8 hrs./lb 40 lbs. 5lbs.

• Consider a second example.
• Compute opportunity cost in the second example.
• Can you characterize the change in Opportunity
  costs?
• The difference in opportunity costs has widened,
  i.e. the farmer and rancher are more different.
• Suppose the farmer and rancher productive
  resources, i.e. labor as in the original example.
  What will happen to collective welfare?
• What has happened to the individual and
  collective gains from specialization and
  exchange?
• See next slide.

The difference in OC is greater in the second
example compared to the first example. For Meat
2 to 1/8th vs. 8 to 1/8th. For Potatoes 1 to 8
vs. 1/8th to 8. In the second example to Rancher
and the Farmer are More Different.
Second Example Second Example Second Example Second Example Second Example
Hours Needed to Make 1 pound of Hours Needed to Make 1 pound of Amount Produced in 40 hrs Amount Produced in 40 hrs
Meat Potatoes Meat Potatoes
Farmer 40 hrs./lb 5 hrs./lb 1 lbs. 8 lbs.
Rancher 1 hr./lb. 8 hrs./lb 40 lbs. 5lbs.
Opportunity Costs Opportunity Costs Opportunity Costs Opportunity Costs Opportunity Costs
Original Example Original Example Second Example Second Example
Meat Potatoes Meat Potatoes
Farmer 2 1/2 8 1/8
Rancher 1/8 8 1/8 8
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The Effect of Specialization According to
Comparative Advantage and Exchange Second Example
Farmer sells 3 lbs. of potatoes for 3 lbs. of
meat.
The Outcome Without Trade The Outcome Without Trade The Outcome With Trade The Outcome With Trade The Outcome With Trade The Outcome With Trade The Gains From Trade The Gains From Trade
What they Produce and Consume What they Produce and Consume What They Produce What They Trade What They Consume What They Consume The Increase in Consumption The Increase in Consumption
Farmer 1 lb. meat ½ lb. meat Point A O lbs. meat O lbs. meat Get 3 lbs. of Meat for 1 lb. of Potatoes Get 3 lbs. of Meat for 3 lb. of Potatoes 3 lbs. of Meat 3 lbs. of Meat Point A 2 lbs. Meat 2 ½ lbs. Meat A to A
2 lbs. potatoes 4 lbs. potatoes Point A 4 lbs. Potatoes 8 lbs. Potatoes Get 3 lbs. of Meat for 1 lb. of Potatoes Get 3 lbs. of Meat for 3 lb. of Potatoes 3 lbs. of Potatoes 5 lbs. of Potatoes Point A 1 lbs. Potatoes 1 lbs. Potatoes A to A
Rancher 20 lbs. meat 20 lbs. meat Point B 24 lbs. Meat 24 lbs. Meat Give 3 lbs. of Meat for 1 lb. of Potatoes Give 3 lbs. of Meat for 3 lb. of Potatoes 21 lbs. of Meat 21 lbs. of Meat Point B 1 lb. Meat 1 lb. Meat B to B
2 ½ lbs. potatoes 2 ½ lbs. potatoes Point B 2 lbs. Potatoes 2 lbs. Potatoes Give 3 lbs. of Meat for 1 lb. of Potatoes Give 3 lbs. of Meat for 3 lb. of Potatoes 3 lbs. of Potatoes 5 lbs. of Potatoes Point B ½ lb. of Potatoes 2 1/2 lb. of Potatoes B to B
Second Example in Blue.
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The More Different Principle

• The more different, i.e. the greater the
  difference in their opportunity cost of producing
  goods, two parties to a potential exchange are,
  the greater the collective and individual
  enrichment that will occur if they specialize
  according to comparative advantage and exchange.

41
Review

• Individuals, groups, countries, and societies can
  enrich themselves collectively and individually
  by specializing in the production of goods in
  which they have a comparative advantage and
  exchanging in the market for goods in which they
  have a comparative disadvantage (specialization
  and exchange).
• No coercion is necessary to make individuals,
  groups, countries, and societies specialize and
  exchange because it is in their self interest to
  do so.
• The policy or system which increases wealth is
  therefore to do nothing. This is policy is also
  referred to as a free markets policy, capitalism,
  letting the market operate, etc.
• In fact, any interference in voluntary exchange
  will reduce collective and individual wealth by
  limiting the extent to which comparative
  advantage is exploited.
• If comparative advantage exists enrichment is
  possible through specialization and exchange. The
  amount of enrichment, both individual and
  collective, is proportional to the degree of
  comparative advantage.
• The more different two parties to a voluntary
  exchange, the greater the benefits from exchange.

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Features of the world explained by more different
principle.

• The greater the difference in opportunity costs
  between two people, groups of people, or
  countries, the greater the potential gain from
  specialization and voluntary exchange according
  to comparative advantage.
• The correct immigration policy
• U.S. Constitution and the requirements for
  citizenship.
• Immigration Policy before 1910s.
• National Origins Immigration Policy.
• Restrictions on voluntary exchange-move and
  countermove.
• Application of More Different Principle.
• Does the National Origins Immigration Policy
  correctly apply the more different principle?
• Geographic distribution of Jews.
• Why have Jews distributed themselves in small
  pockets around the world rather than
  concentrating in one area?
• Application of More Different Principle.

43
You choose?
44
Proposed Immigration Point System

• An applicant could receive a maximum of 100
  points. Up to 75 points would be allocated for
  job skills and education, with 15 for
  English-language proficiency and 10 for family
  ties.
• The criteria favor professionals with graduate
  degrees in science, technology, engineering and
  mathematics. But the point system would also
  reward people who work in 30 ''high demand''
  occupations, like home health care and food
  service.
• Spouses and minor children of United States
  citizens would still be allowed to immigrate
  without limits. But siblings and adult children
  of citizens and lawful permanent residents would
  be subject to the point system. They could get a
  maximum of 10 points for family ties, provided
  they had already earned 55 points for job skills,
  education and English language ability.

45
Geographic Distribution of Jews