09 07 2012 Economics Study of choices that arise from scarcity Shortage People have to choose how to use their time and resources because things are scarce Everybody makes choices because things are scarce Time money Most people think economics is just about business choices but it s broader There is a finite amount of time and if you spend your time doing one thing u use your time less for others There is a limited amount of money o If you increase taxes on rich then there is more revenue but less money for rich to spend In 1960 there was a saying if we put a man on the moon why can t we do simpler things o The point is that we spent our time and money and resources putting a man on the moon and less on other things The Benefit forgone from not choosing the next best alternative Opportunity Cost Economic Goods Scarce Price greater than zero Free Goods o Abundant Price zero Economics No choice to make not scarce Not something to think about Study of how individuals and organizations allocate scarce resources among alternative uses to satisfy unlimited human wants o Many different decision making processes from various organizations o Humans always want more and more o Advertising Make you feel like you aren t good enough and there are things that are lacking Technology keeps changing which makes wants keep Resource Inputs Return changing Land steel iron rocks crops Environment Must extract Must Economic Rent What landowners receive as a resource Remove waste All impose cost Labor all physical human effort Wage Salary to do the labor Physical Capital Tools that do Interest The money used to get the production tools to do production If you buy a stock then firms can buy financial capital You get interest in return Entrepreneurship Find new ways to Profit Use these ways to produce produce things excess money that exceeds expenses Production Function Inputs Resources production process Products Goods Services Production Firms their output National Output Level Micro Macro GDP What everyone produces Prices What prices are charged Inflation change of by the firm itself prices over time Employment Industry state level of Unemployment Rate bring jobs national level Microeconomics Individual Decision Making o Households Firms How these individuals interact in markets Resource Allocation Macroeconomics Aggregate Big Picture Economic Variables GDP market value inside country s borders Unemployment Inflation Money Supply Interest Rates Exchange Rates o Keep them low to encourage buying o Different Rates between different countries Balance of Payments Before Great Depression there was only Economics but after it was split into micro macro Hoover believed he had to let economy correct itself If they wait long enough the prices fall and wages fall which would bring the economy back When FDR brought in he decided to do things He split Macro and Micro Kasian Economics Positive Analysis What Is o Descriptive o Objective beliefs o Factual No opinion o Value Free Having an analysis without bringing ones opinions and How your opinion will make the world a better place Cant separate the analysis from the person doing the o Causative statements If X then Y Normative Analysis What ought to be o Prescriptive o Subjective analysis o Opinions Not Testable o Values and explicit Positive Facts Verified by data statistics Normative Opinions Moral Federal Open Market Committee need another system Kept interest rates very low they are as low as possible so they o Starting buying reserves from banks now banks have more money to lend out to raise money supply Methodology of Economics How do economists study the world Model Building simple model o Use Assumptions Overriding assumptions of economics Rational self interest o Starting with a complex reality and breaking it down into a o Economic decisions are made with the purpose of making the decision maker better off Ex Which ice cream would you like You pick the flavor that makes you most happy More is better Ceteris Paribus o Everything else remains the same All other things held constant Scientific Method Recognizing the problem o Make Assumptions Use the assumption to develop a model Make Predictions Test Model o If it doesn t work you start over 09 07 2012 Democrat vs Republican How they want to reduce deficit Employment Data is released on the second Friday of the next month They call businesses and households for surveys The Cocoa is a great example of how economics work Process of production and consumption 10 18 12 5 05 PM Opportunity Cost First Model The benefit forgone from not choosing the next best alternative If we use our resources for one activity we cant use it for another Production Possibilities Curve o AKA Frontier PPC o A Model that shows the maximum combinations of two goods that could be produced given a certain quantity of resources and state of technology Example 1 Assume Choices of a college student o Academic Life vs Social Life Hours Studying vs Beer drinking Can divide time between studying and drinking beer 10 Hours day 7 days a week 70 hours a week 15 weeks per semester 1050 hours per semester Can drink 2 hours per hour Cant study and drink beer at same time Beer is free Beers E Per Semester 2100 1050 525 1050 hours studying semester Points A B C are efficient Point D is inefficient Point E is unattainable impossible Slope of PPC Rise Run 2100 1050 2 beers hour Equals the opportunity cost of good on horizontal axis Example 2 You have 24 shots of vodka A sombrero takes 2 A white Russian takes 3 Sombreros Max 12 8 White Russians Since Max is 24 you got to decide how much of each you could serve Slope is 3 2 which is opportunity cost of the white Russians You get 3 white Russians to every 2 sombreros Ex 3 Economy as a whole Guns vs Butter Military output vs civilian output Possibilities Butter tons Guns tons Opportunity cost of 1 ton of butter A B C D E F 0 1 2 3 4 5 20 19 16 12 7 0 1 gun 3 gun 4 gun 5 gun 7 gun 20 A B 16 C 12 D E 4 F 0 1 2 3 4 5 8 A B C D E F Since slope gets steeper it means opportunity cost is increasing Law of Increasing Cost As production of a good increases the opportunity cost of additional units of that good will also increase Due to specialization of resources Example 4 Production Levis Coke 1 2 3 4 5 18 17 15 12 7 18 14 10 6 P A B C D E F Slope 1 2 3 5 7 0 1 2 3 4 5 If we increase Levi we give up coke Changes to PPC s Change in resources EX Immigration o Labor resources Change in technology Invention of a