ECO 201 Ch 1 2 Lesson Notes 1 Economics Dismal science science of scarcity not enough to go around a b efficient best use of limited resources to satisfy unlimited wants and needs of humans 2 Opportunity Cost real cost a Highest valued alternative given up when another choice is made cost what would have been All choices have opportunity cost b Examples Go to class Alternatives job sleep date shopping movie TV If job was highest valued alternative then the opportunity cost of going to class is the income that could have been made at the job Go to college cost of tuition books etc 12k Alternative job choices 30k to work for dad Highest first alternative 15k to play in band 10k to work at Wal Mart The opportunity cost of going to college is 42k 12 tuition and 30k income Choose college if the marginal benefits of college is greater than 42k Weekend date to New Orleans Date concerts tickets food etc 600 O C 600 and F on exam study for exam 0 O C fun of date 1 ECO 201 Ch 1 2 Lesson Notes 3 Efficiency vs Equity a Efficiency increase opportunity jobs and growth in the economy more output with same resources same output with less resources highest valued use lowest cost Inefficiency Resources 13 Resources 3 output 100 inefficient output 100 efficient b Equity normative who gets the bread income distribution poor can t afford price gap rich vs poor social justice employment free trade Equity Solution capitalism Income Redistribution since new deal depression rich poor disabled welfare working elderly retired social security taxpayer special groups farmer students farm aid student loans Pell Grant unemployment comp workman s comp Cruel Trade off more equity less efficiency less GDP higher unemployment Europe weight of welfare state opportunity cost of equity and social justice has been slow growth and unemployment Germany France recently voted for more efficiency Production Possibilities Model simplified representation of real world looking only at essential variables needed to understand very complex relationships that we are interested in while omitting variables not needed to establish the relationship ceteris paribus all else the same Maximum quantity of goods and services an economy can produce GDP output of goods and services c Assumptions full employment of resources land labor capital and entrepreneurs economy efficient latest technology no technology change simplify 2 goods bread and roses d Productions Possibilities Model Implications of PP 2 ECO 201 Ch 1 2 Lesson Notes 1 Scarcity a Limits to production b No free lunch c Every choice involves tradeoffs d See not attainable on graph 2 Opportunity Cost a highest valued opportunity or alternative given up when making a choice pecuniary not pecuniary grades O C of increasing rose production in cost of bread 3 Full Employment point on PP a maximum potential GDP any point on curve is efficiency b natural GDP c highest standard of living unemployment is any point below curve triangle is lost GDP low standard of living social costs 1 2 3 4 5 depression suicide addiction abuse crime 4 Economic growth increased productivity a b more GDP with resources c unattainable is now attainable d rightward shift in curve Causes of Economic Growth 3 requires saving bigger pie with no population growth more for same number of people ECO 201 Ch 1 2 Lesson Notes 1 More resources capital accumulation 2 better technology Summary Exchange Goods for money Market Choice decision Why wellbeing benefit Marginal Benefits Marginal Costs O C transactions cost time and money it takes to complete and exchange entrepreneurs lower transactions cost and increase exchanges Unintended Effects Perverse Incentives Seat belts intended effect save lives unintended effect more accidents Higher tax rates Laffer curve effect Raise minimum wage intended effect raise revenue and reduce debt unintended effect lower tax base less revenue and more debt intended effect increase income improve standard of living unintended effect unemployment decreased standard of living More saving Savings Paradox intended effect individual wealthier unintended effect society poorer spend less 4