January 9 2012 I Economics a The study of how we allocate scarce resources across competing interests b Parts 1 Microeconomics Individual choice a b Firm decisions c How the market affects decisions 2 Macroeconomics a Government decisions affecting the economy b Unemployment c Economic growth d Government spending 1 Monetary policy 3 Econometrics a Statistics for economics c Factors of production 1 Natural resources 2 Labor a Workers 3 Physical capital a Assembly lines b Machines c Tools 4 Human capital a Education b Experience c Skills d What should be produced 1 Trade offs a Illustrated by the production possibilities curve 1 We assume we use out limited production to manufacture goods 2 Production is efficient if a All factors of production are being used b All factors of production are being used in their most productive employment 3 Possible a Point A 4 Efficient a Point A 1 Not possible a Above the curve a Below the curve b Point B 1 Possible c Point C 1 Possible d Point D 1 Possible a On the curve a On the curve 1 Not efficient a Above the curve b Point B 1 Not efficient a Below the curve c Point C 1 Efficient d Point D 1 Efficient a On the curve a On the curve e Key principles of economics 1 Opportunity cost a The cost of foregoing the next best opportunity 1 Opportunity cost Cost Gain a At which point is the opportunity cost the highest 1 When more iPads are foregone a Point B b Economic cost 1 Cost of accounting cost and opportunity cost a Accounting cost 1 Total cost Tuition Dorm Books Total Accounting cost Job salary Opportunity cost Total Economic cost 18 000 8 000 8 000 34 000 40 000 74 000 2 Marginal principle a Fixed costs FC 1 Costs that do not change with quantity b Variable costs VC 1 Costs that change with quantity c Total cost TC 1 Total cost of an activity 2 Total cost Fixed cost Variable cost a TC FC VC d Marginal cost MC 1 The change in total cost when producing one additional unit 2 The slope along the total cost curve e Total revenue TR f Profit 1 The amount of money a firm makes for selling goods 1 Profit Total revenue Total cost a TR TC g Marginal revenue MR h Marginal principle MP 1 The change in total revenue when one the firm sells one additional unit 2 The slope along the total revenue curve 1 The optimal level of an activity max profit occurs when marginal revenue is equal to marginal cost a MP occurs when MR MC b Set MR MC to find Q 1 At Q profit is maximized c Q is still optimal 1 It represents the smallest loss for the firm 3 Diminishing returns a In any productive activity increasing an input beyond some level will eventually result in diminishing increases in output b Only have to happen in the short run c Short run d Long run 4 Externalities 1 The period of time in which at least 1 production factor is fixed a Typically capitol 1 The period of time in which all production factors are adjusted a Also known as spillovers b Economic costs or benefits not experienced by the economic decision maker 1 Negative externalities a Costs imposed 1 Example a Pollution 2 Positive externalities a Benefits imposed 1 Example a Public goods be socially optimal 5 Gains from trade c When externalities exist private decisions about the level of economic activity may not a Absolute advantage producer 1 A country has an absolute advantage if it is more productive in a given good than a The ability to produce a good using fewer inputs than another competitor b Comparative advantage another producer 1 A country has an comparative advantage if it has a lower opportunity cost of The ability to produce a good at a lower opportunity cost than producing the good than a competitor 2 With trade the countries specialize in the good in which they have comparative advantage a By specializing in the good in which a country has comparative advantage countries are better off or at least as well off with trade than without trade c Example Kent Akron Loaves of bread 6 10 minutes each 1 60 minutes each Shirts 2 30 minutes each 1 60 minutes each Opportunity cost of bread 1 3 shirt 1 shirt Opportunity cost of shirts 3 loaves of bread 1 loaf of bread 1 Kent has absolute advantage in both bread and shirts 2 Kent has comparative advantage in bread 3 Akron has comparative advantage in shirts 4 Each country has 2 hours of labor a Each country wants 1 shirt b Kent makes bread 1 12 loaves of bread in 2 hours c Akron makes shirts 1 2 shirts in 2 hours Without trade Kent 1 shirt Akron 1 shirt 1 loaf of bread 1 loaf of bread With trade Kent Price Akron 1 shirt 11 loaves of bread 1 loaves of bread 1 shirt 1 shirt 1 loaf of bread 1 shirt 10 loaves of bread 2 loaves of bread 1 shirt 1 shirt 2 loaves of bread 1 shirt 9 loaves of bread 3 loaves of bread 1 shirt 1 shirt 3 loaves of bread 5 Overall result a Individual winners and losers from trade 1 Bakers in Kent and tailors in Akron win 2 Tailors in Kent and bakers in Akron lose f Math digression 1 Graphing lines a Formulas 1 Slope intercept form a y mx b 1 m is the slope 2 b is the y intercept 2 Slope a m the change in y 1 m y2 y1 x2 x1 the change in x b Example 9 10 2 4 1 2 1 2 1 2 y x b a Plug in point 9 2 1 9 2 b 2 9 1 b 3 8 b 4 Equation of line 5 y x 8 3 Percentage change 1 Percentage change a P 2 P 1 100 P1 2 Notes a Price p is on the y axis b Quantity q is on the x axis c Coordinate point is p q 2 Calculate percentage change in price a 60 50 50 100 20 b Example 1 Information a P1 50 b P2 60 c Example 1 Information a P1 30 b P2 28 c Q1 60 d Q2 80 2 Find equation of line a Points 1 30 60 and 28 80 b Slope 28 30 80 60 2 20 1 10 c y 10x b 1 30 1 10 60 b 2 30 6 b 3 36 b 4 y 1 10 x 36 3 Calculate percentage change in price a 28 30 30 2 30 1 15 100 6 2 3 change g Consumer behavior price 1 Consumer behavior The demand curve maps the quantity consumers demand at a given 2 Law of demand a Demand curve slopes downward Decreasing price results in increasing quantity demanded 1 Example a Moving from point A to point B 1 Demand has …