PRINCIPLES.pdf

DYNAMIC POWERPOINT™ SLIDES CHAPTER 1 BY SOLINA LINDAHL First Principles FOOD FOR THOUGHT…. SOME GOOD BLOGS AND OTHER SITES TO GET THE JUICES FLOWING: C O P Y R I G H T 2 0 1 5 W O R T H P U B L I S H E R S Microeconomics vs Macroeconomics Microeconomics The study of individual choice under scarcity...

DYNAMIC POWERPOINT™ SLIDES CHAPTER 1 BY SOLINA LINDAHL First Principles FOOD FOR THOUGHT…. SOME GOOD BLOGS AND OTHER SITES TO GET THE JUICES FLOWING: C O P Y R I G H T 2 0 1 5 W O R T H P U B L I S H E R S Microeconomics vs Macroeconomics Microeconomics The study of individual choice under scarcity and its implications for the behavior of prices and quantities in individual markets. Macroeconomics The study of the performance of national economies, and of the policies that governments use to try to improve that performance. C O P Y R I G H T 2 0 1 6 W O R T H P U B L I S H E R S Back to Table of contents Why study microeconomics? § § § Successful managers and entrepreneurs understand the markets in which they operate This enables them to define a coherent business strategy and to adjust it when external conditions vary Being able to understand and describe one’s own market is also necessary to articulate effective relationships with potential investors, lenders and other stakeholders To First Active Learning C O P Y R I G H T 2 0 1 6 W O R T H P U B L I S H E R S To Back to of VideoTable contents What you will learn in this chapter § A set of principles for understanding the economics of how individuals make choices § A set of principles for understanding how economies work through the interaction of individual choices § A set of principles for understanding economy-wide interactions To Video To First Active Learning C O P Y R I G H T 2 0 1 6 W O R T H P U B L I S H E R S CHOICE: THE HEART OF ECONOMICS. She must choose. And her choice affects others. Back to Table of contents INDIVIDUAL CHOICE: THE PRINCIPLES 1. Choices are necessary because resources are scarce. Back to Table of contents RESOURCES AND SCARCITY Resource: anything that can be used to produce something else. Scarce: in short supply; a resource is scarce when there is not enough of the resource available to satisfy all the various ways a society wants to use it. Back to Table of contents INDIVIDUAL CHOICE: THE PRINCIPLES 2. The true cost of something is its opportunity cost. Opportunity cost: what you must give up in order to get something. Mark Zuckerberg understood the concept of opportunity cost—and dropped out of Harvard. Back to Table of contents LEARN BY DOING: PRACTICE QUESTION Should I go skiing today? From experience you can confidently say that a day on the slopes is worth $50 to you. The charge for the day is $30 (which includes bus fare, lift ticket, and equipment). Should I go skiing? Back to Table of contents LEARN BY DOING: PRACTICE QUESTION Should I go skiing today? But this is not the only cost of going skiing. You must also take into account the value of the most attractive alternative you will forego by heading for the slopes. Suppose that if you don't go skiing, you will work at your new job as a research assistant for one of your professors. The job pays $40 dollars per day, and you like it just well enough to have been willing to do it for free. "Should I go skiing or stay and work as a research assistant?" Back to Table of contents LEARN BY DOING: PRACTICE QUESTION Should I go skiing today? C(x) = cost of skiing plus value of forgone earnings = $30 + $40 = $70 B(x) = $50 < C(x), So don't go skiing. Back to Table of contents LEARN BY DOING: PRACTICE QUESTION Should I go skiing today? The fact that you liked your job just well enough to have been willing to do it for free is another way of saying that there are no psychic costs associated with doing it. This is important because it means that by not doing the job you would not be escaping something unpleasant. Suppose instead that your job had been to scrape plates in the dining hall for the same pay, $40/day, and that the job was so unpleasant that you would be unwilling to do it for less than $25/day. Should you go skiing? Back to Table of contents LEARN BY DOING: PRACTICE QUESTION Should I go skiing today? B(x) = $25 + $50 = $75 C(x) is the same as before, namely the $30 ski charge plus the $40 opportunity cost of the lost earnings, or $70. So now B(x) > C(x), which means you should go skiing. Back to Table of contents INDIVIDUAL CHOICE: THE PRINCIPLES 3. “How much” is a trade-off and is a decision at the margin. Trade-off: comparison of the costs and the benefits of doing something. Each bite of the candy bar has costs and benefits. Back to Table of contents INDIVIDUAL CHOICE: THE PRINCIPLES Marginal decision: decision made at the margin of an activity about whether to do a bit more or a bit less of that activity. Marginal analysis: the study of marginal decisions. Incentive: anything that offers rewards to people who change their behavior. Back to Table of contents INDIVIDUAL CHOICE: THE PRINCIPLES There is a reciprocal relationship between costs and benefits. Not incurring a cost is the same as getting a benefit. By the same token, not getting a benefit is the same as incurring a cost. Economic Surplus is the benefit of taking any action minus its cost The goal of economic decision makers is to maximize their economic surplus. Back to Table of contents LEARN BY DOING: PRACTICE QUESTION Is it fair to charge interest when lending a friend some money? Suppose a friend lends you $10,000, and her primary concern in deciding whether to charge interest is to decide if it would be "fair" to do so. Is it fair to charge interest? Back to Table of contents LEARN BY DOING: PRACTICE QUESTION Is it fair to charge interest when lending a friend some money? She could have put that same money in the bank, where it would have earned, say, 5 percent interest, or $500 each year. If she charges you $500 interest for each year the loan is out, she is merely recovering the opportunity cost of her money. If she didn't charge you any interest, it would be the same as giving you a gift of $500/yr. Back to Table of contents INDIVIDUAL CHOICE: THE PRINCIPLES 4. People usually respond to incentives, exploiting opportunities to make themselves better off. In the United States, restaurant customers have the option of adding a tip to the restaurant bill. In much of Europe a tip is added automatically. Where would you expect waiters to be more attentive? Back to Table of contents LEARN BY DOING: BUSINESS CASE CAN YOU SPOT THE PROBLEM WITH THIS INCENTIVE SYSTEM? A juvenile prison in Pennsylvania offered judges bribes the more young people they sent to jail. One teen was jailed for a Facebook page that was critical of her high-school principal. Both judges pleaded guilty to accepting $2.6 million in bribes. To Next Active Learning Back to Table of contents INTERACTION AND INDIVIDUAL CHOICE 5. There are gains from trade. Trade allows us all to consume more than we otherwise could. Back to Table of contents Origin of the Idea David Ricardo (1772–1823) Argued against Corn Laws in British Parliament. Corn Laws: high tariffs on imported grain that protected British landowners. His theory of comparative advantage is still the ideological foundation for free trade. Back to Table of contents COMPARATIVE ADVANTAGE AND GAINS FROM TRADE Since each country has a different opportunity cost, it makes sense to specialize and trade. Figure 8-2 Krugman/Wells, Microeconomics, 5e,(c) 2018 Back to Table of contents INTERACTION AND INDIVIDUAL CHOICE Specialization: the situation in which each person/countries specializes in the task that he or she is good at performing. Back to Table of contents COMPARATIVE ADVANTAGE VERSUS ABSOLUTE ADVANTAGE Don’t confuse absolute advantage and comparative advantage. Just because a country can produce more of two goods doesn’t mean it is better off without trade. Pay attention to opportunity costs. If it’s cheaper for one country to produce a good than it is for another country, this country will want to import that good from the other. Back to Table of contents Economic Growth Quantity of Dreamliners The economy can now produce more of everything. 35 E 30 A 25 20 15 10 5 Original New PPF PPF 0 10 20 25 30 40 50 Quantity of small jets Back to Table of contents What Causes Economic Growth? Two possibilities: 1. An increase in factors of production: resources used to produce goods and services. 2. Better technology: the technical means for producing goods and services. Back to Table of contents Factors of Production 1. Land includes natural resources, such as mineral deposits, oil, natural gas, water, and actual land acreage. Back to Table of contents Factors of Production 2. Labor is the mental and physical abilities of the workforce. Back to Table of contents Factors of Production 3. Physical capital is manufactured items used to produce other goods and services. Back to Table of contents Economic Resources 4. Human capital is the educational achievements and skills of the labor force (which increase labor productivity). Back to Table of contents INTERACTION AND INDIVIDUAL CHOICE 6. Markets move toward equilibrium. Equilibrium: an economic situation in which no individual would be better off doing something different. Back to Table of contents LEARN BY DOING: APPLICATION VIDEO For a look at a real-world equilibrium, click the picture below to see the Aalsmeer Dutch Tulip auction in action. (3 minutes) https://www.youtube.com/watch?v=692uYk1pHFQ Back to Table of contents LEARN BY DOING: BUSINESS CASE Lane speeds reach equilibrium quickly as people respond to incentives. Back to Table of contents INTERACTION AND INDIVIDUAL CHOICE 7. Resources should be used efficiently to achieve society’s goals. Efficient: taking all opportunities to make some people better off without making other people worse off. Back to Table of contents INTERACTION AND INDIVIDUAL CHOICE Equity trumps efficiency in disabled parking space offerings. Equity: a condition in which everyone gets his or her “fair share.” (There are many definitions of equity.) EQUITY AND EFFICIENCY ARE OFTEN AT ODDS. Back to Table of contents INTERACTION AND INDIVIDUAL CHOICE 8. Markets usually lead to efficiency. People normally take opportunities for mutual gain. Back to Table of contents INTERACTION AND INDIVIDUAL CHOICE 9. When markets don’t achieve efficiency, government intervention can improve society’s welfare. Sometimes markets fail and need correction. Back to Table of contents Discussion Discuss the efficiency and equity implications of each of the following. How would you go about balancing the concerns of equity and efficiency in these areas? a. The government pays the full tuition for every college student to study whatever subject he or she wishes. b. When people lose their jobs, the government provides unemployment benefits until they find new ones. Back to Table of contents Discussion a. Although this policy is equitable, it may not be efficient, depending on the beneficial side effects of education. It does allow everyone, regardless of ability to pay, to attend college. But it may not be efficient: subsidizing the full cost of tuition for everyone lowers the opportunity cost of going to college, and this might lead some people to go to college when they could more productively follow a career that does not require a college education. And since resources (including government money) are scarce, paying tuition for these people has an opportunity cost: some other government projects cannot be undertaken. One way of getting around this problem is to award scholarships based on academic ability. Back to Table of contents Discussion b. Although this policy may be equitable (it guarantees everyone a certain amount of income), it may not be efficient. People respond to incentives. If unemployment becomes more attractive because of the unemployment benefit, some unemployed people may no longer try to find a job or may not try to find one as quickly as they would without the benefit. Ways to get around this problem are to provide unemployment benefits only for a limited time or to require recipients to prove that they are actively searching for a new job. Back to Table of contents ECONOMY-WIDE INTERACTIONS 10. One person’s spending is another person’s income. Back to Table of contents ECONOMY-WIDE INTERACTIONS During recessions, a drop in business spending leads to: Less income, less spending… …and further drops in business spending, layoffs, and rising unemployment. Back to Table of contents ECONOMY-WIDE INTERACTIONS 11. Overall spending sometimes gets out of line with the economy’s productive capacity. Back to Table of contents ECONOMY-WIDE INTERACTIONS 12. Government policies can change spending. The U.S. government funded the WPA and provided almost 8 million jobs between 1935 and 1943. Back to Table of contents