Chapter 1 Econ and Life 09 08 2015 o Ex One group eats for free one pays Which one will eat more The group that didn t receive a refund ate more pizza psychologically compensating for paying money want to get maximum bang for their buck o Ex Would you go to a game in bad weather conditions if you paid 100 or if you got tickets for free Would be more inclined to go in 100 paid o Choices and rational behavior Economists assume that people compare all available choices Purposefully behave in the way that will best achieve their goals called rational behavior Rational behavior suggests that people compare the additional benefits of a choice against the additional costs Comparing additional benefits and costs of a choice is called marginal decision making or thinking at the margin Opportunity cost Rational behavior suggests that people compare the additional benefits of a choice against the additional costs Included in the costs are opportunity costs o Marginal Costs and Benefits Firm businesses o Additional revenue from selling one more gallon of gas o Additional cost of producing one more gallon of gas US EPA o Additional benefit from eliminating one more ton of pollutants o Additional cost of eliminating one more ton of pollutants Consumer o The value to you from watching one more hour of Netflix o The cost of watching one more hour of Netflix MC MB is the target point people and businesses want to consume and produce there Individuals and firms can make better decisions by thinking at the margin o Sunk Cost be recovered A sunk cost is a cost that has already been committed and cannot Ex 1 The 1500 spent is a sunk cost and you can t recover that money At the margin the cost of finishing the project is 6000 1500 4500 The marginal benefit is 4000 MC MB so they shouldn t complete the project Chapter 2 Trade 09 08 2015 Economists generally think trade is good and trade barriers and tariffs shouldn t exist whereas the general public is a lot more split with the majority not agreeing to take down tariffs o One way to understand the invisible hand is the production possibility model Two goods being produced Each producer has their own production technology i e They each have strengths and weaknesses o Model analyzes who produces which goods Absolute advantage is the ability to produce more of a good or service than others can with a given amount of resources It doesn t really matter who has the absolute advantage Comparative advantage is the ability to produce a good or service at a lower opportunity cost than others Facilitates trade Ex 5W 20M you can have one or the other Divide through by 5 and it becomes 1W 4M Opportunity cost for 1 Wheat is 4 Meats or for 1 Meat it s of a wheat o Specialization o Convex PPF An individual or country or economy can gain from trade even if it has an absolute advantage in the production of all goods The opportunity cost of producing an additional unit of a good typically increases as more resources are allocated to its production More realistic Have different slopes in different places o Since opportunity cost slope this means opportunity cost varies by the location in the graph The PPF shifts when resources are adjusted typically assume that tech and resources are held constant If more workers the PPF just shifts outward all together If it s specified that the workers are better at one thing or another or if you get a new technology you might be better at one thing so it would shift out at the bottom most point Ex You manage a car repair shop with two workers One is good at brakes one is good at oil T or F A PPF for the shop would be a straight line o False They re differently good at different things If they were equally good at both tasks then it would be a straight line o o Ben o Joe o Meat o 20 o 30 o Wheat o 5 o 15 EX Who has comparative advantage in meat 4 Meat 1 Wheat 2 Meat 1 Wheat 4 4 Meat Wheat 2 2 Meat Wheat 1 Meat Wheat 1 Meat Wheat Someone can t have comparative advantage in production of both goods o One explanation b c of the way fractions work o Another explanation One would have to give up more to make the same thing You have to think about what each is giving up to determine who s a better producer of a certain good Trade is always beneficial to both parties Given that the price is reasonable o EX Suppose Ben trades 9 lb of meat in exchange for 3 bushels of wheat just trading random quantities could make a diff t trade agreement Ben was specializing at meat since he has a comparative advantage had 20 gave up 9 so 20 9 11 Now he has 11 lb of meat left Since he was specializing he initially had 0 bushels of wheat and got 3 bushels of wheat 0 3 3 Joe initially had 15 bushels of wheat gave 3 up so now he has 12 bushels of wheat Now he also has 9 lb of meat and before he had 0 because he was also specializing Both are better off now they re both at a point that used to be unattainable outside of the line on the PPF o Main argument against this may gain more or less compensation may not be equal A farmer may have to be retrained to find a new job While country would be better off as a whole certain individuals may not When everything balances out some people 09 08 2015 Markets service o A market refers to the buyers and sellers who trade a particular good or o Markets can be located locally globally or even virtually o One special class of markets is the competitive market o Four characteristics of perfectly competitive markets 1 standardized good 2 full information 3 no transaction costs 4 participants are price takers o In this chapter markets are assumed to be perfectly competitive o There is a difference between want peoples unlimited desires or wishes for goods and services and demand a decision about which wants to satisfy o The law of demand states that all else equal quantity demanded rises as price falls o Violations of law of demand Smartphones why wouldn t people buy the cheapest phone out there B c not all phones are equal other factors come into play Textbooks gas housing market are all not in violation o Change in demand versus Change in quantity demanded First one is where the actual line shifts Second one is movement up and down the line Non price Determinants of Demand o Consumer preferences including demographics o Ex Movie clip where no one wanted hula hoops even when they were free and then when one kid hula hooped everyone wanted to get them and the price rose This was …
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