ECON 100 1st Edition Lecture 11 Outline of Last Lecture I A Labor Market with a Minimum Wage A Unemployment B Fairness C Efficiency II Taxes A Tax Incidence 1 Elasticity of Demand 2 Elasticity of Supply B Efficiency C Fairness 1 Benefits 2 Ability to Pay III Production Quotas and Subsidies IV Market for Illegal Goods Outline of Current Lecture I Review of Chapters 1 5 A Important Concepts and Terms Current Lecture Macro and Microeconomics What is each about Search for examples of studies that fall in each field review the corresponding quiz 3 Chapter 1 What How and for whom What is produced refers to the type of good or services that is produced manufactured agricultural service How are the goods and services produced refers to the factors of production Land labor capital and entrepreneurship For whom are the goods and services produced refers to who consumes the goods and services produced A relevant question is which factor of production earns what Land earns rent Labor earn wage Capital earns interest These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute Entrepreneurship earns profit Opportunity cost of a good The highest valued alternative that must be given up to get it Question to ask yourself Among the alternatives that I am giving up which one has the highest value to me This alternative is my opportunity cost Choosing at the Margin Marginal benefit the benefit that arises from an increase in activity For example the benefit from the consumption of an additional unit a good Marginal cost the opportunity cost of an increase in an activity For example the cost of making an additional unit of a good Rational decisions involve making choices at the margin by comparing the marginal benefit to the marginal cost Positive v Normative Statements Positive statements what is Normative statements What ought to be A central task of economists is to test positive statements about how the economic world works All the questions on which economists provide advices involve a blend of the positive and the normative Production Possibility Frontier PPF What is that The boundary between the combinations of goods and services that can be produced and the combinations of goods and services that cannot be produced Say the current efficient combination of Goods A and B is 20 units of A 20 units of B If producing 2 more units of Good A means giving up 12 more units of Good B then the opportunity cost of an additional unit of A is 6 units of B at the considered combination Interpret correctly the shape of a PPF It usually is bowed outward because resources are usually not equally suited for producing all goods The opportunity cost of a good increases as more of the good is produced If resources are equally suited to producing the two goods then the opportunity cost of each good remains constant as more of it is produced and the PPF has the shape of a single straight line Economic growth occurs when the PPF is shifted outward Supply and Demand Distinguish the quantity supplied from the supply Distinguish the quantity demanded from the demand Distinguish movements along the demand curve or the supply curve from the shifting of the curve Substitute complements normal inferiorgoods Substitute and complement goods are defined with respect to the cross priceelasticity of demand Normal and inferior goods are defined with respect to the income elasticity of demand Absolute advantage and comparativeadvantage A person who is more productive of a good than others has an absolute advantage in producing the good A person who can produce a good at a lower opportunity cost than anyone else has a comparative advantage in producing that good Differences in opportunity costs make specialization and trade profitable Specialization and trade are mutually beneficial if the price the terms of trade is set between the two different opportunity costs one opportunity cost for each producer Efficiency and Equity Recall the interpretation of the demand as a marginal benefit curve Recall the interpretation of the supply as a marginal cost curve How do you compute consumer surplus Producer surplus Why is the competitive market efficient What is market failure what causes it What are the alternative methods of resource allocation What is a fair result A fair rule Relate these to efficiency