INTRODUCTION

The Economy: is the institutional structure whereby individuals in society coordinate their wants & desires

Economics: is the study of the economy
                1. How people go about making a living
                2. How scarce resources are allocated

Every Society faces THREE central coordination problems:
        1. What to produce & how much
        2. How to produce it
        3. For whom to produce it

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The Basic Economic Problem=> Scarcity

         Scarce resources & unlimited wants/desires
         Capitalism allocates resources by a pricing mechanism

                       SCARCITY FORCES US TO MAKE CHOICES

 SOCIETY GENERALLY PREFERS MORE TO LESS

             The Amish at Nordstrom’s?

                            Who has done more for society – Mother Teresa or
                            Bill Gates?  It depends on what "more" means?  If it
                            means spiritual, then Mother Teresa has done more.
                            If it refers to material well being then Mr. Gates has
                            more.

Ä

the amount of resources depends on human ingenuity — technological innovation

Four Main Resources (inputs): Factors of Production
1. Land
2. Labor
3. Kapital
4. Entreprenuership
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Adam Smith’s Invisible Hand
                    works when there is prices that send signals
                           referred to as the pricing mechanism

   according to Smith the exercise of individual self- interest benefits society

    CONSUMER SOVEREIGNTY: power to decide what is/is not produced

Theories -- Models – over simplifications /abstractions => putting theory in a contextual setting

CETERIS PARIBUS: everything else being equal

The Circular Flow Model of Goods & Services

                                    Micro vs. Macro

  ECONOMIC ANALYSIS
                                                Positive         vs.         Normative
                                                objective       vs.         subjective
                                                empirical      vs.         value judgement

The Art of Economics=> Integrating positive & normative

What do economists know?     UNCERTAINTY -- things change!

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 PRODUCTION POSSIBILIES & OPPORTUNTIY COSTS
 
 

OPPORTUNITY COST: The quantity of a good that must be given up in
                                            order to obtain a good

                     The foregone value of the nest best alternative
 

 Opportunity Costs can be seen numerically by way of a:

                      PRODUCTION POSSIBILITY TABLE
                                    like an input/output table

Opportunity Costs can be seen graphically by way of a:

                      PRODUCTION POSSIBILITY CURVE

 The table & the curve will show different combinations of output society can choose from. When society wants more of one item then it must give up some of another item.
 

ASSUMPTIONS:

1. Full employment of all resources (in this case labor)

2. The level of technology is constant

3. Resources are interchangeable w/out inefficiency

4. Society prefers more to less

5. Society produces only tacos & tequila/no trade
 
 

hrs. Labor         Tacos         hrs. Labor         Tequila

            20             200                  0                         0

            15             150                  5                         15

            10             100                 10                         30

            5                 50                 15                         45

            0                 0                   20                         60

 Opportunity Cost of tacos for tequila

50 tacos/15 tequila (3.33 tacos for 1 tequila)

* if society wants tacos it must give up tequila -- just reverse the numbers

NEGATIVE SLOPE

                       * There is an inverse relation: to get more of one thing

                           you must give up something else

CONSTANT COSTS: all along the graph the opportunity cost is the same 50/15. This is represented graphically by a straight line PPC

Now, we will drop the assumption that resources are interchangeable, because some resources are better suited for the production of one good than another

 COMPARATIVE ADVANTAGE (narrowly defined): To be better suited for the production one good than the production of another

Basketball Players & Jockeys

&

World’s fastest typist

 Production Possibilities Table

 Point         Missiles             Big Macs
        A                         3                                     0

        B                         2                                     10 billion

        C                         1                                     14 billion

        D                         0                                     15 billion

                 This implies... The Law of Increasing Costs, or,
                      The Law of Increasing Marginal Opportunity Cost:

        to get more of something you have to give up ever increasing quantities of something else

Efficiency: achieving a goal as cheaply as possible

Productive Efficiency: getting the most output from the fewest possible inputs

Inefficiency & Unattainable

 Shifts in the PPC

        1. Technology improves

        2. Resources discovered/destroyed (Kobe)

        3. Efficiency of economic institutions

        4. Population / workforce

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Chapter 3

DEMAND AND SUPPLY

Some economists never leave this model
 

LAW OF DEMAND: More quantity of a good will be demanded the lower its price, other things held constant.

OTHER THINGS HELD CONSTANT

(Ceteris Paribus)

or...

Less quantity of a good will be demanded the higher its price, other things equal

PROBLEM: Why does the demand for cars go up every year along with increases in P?

RELATIVE vs. MONEY PRICE (nominal price)

Example=> CPI ­ 10%, wages ­ 10%

BUT, Jumbo Jacks ­ only 5%
 

THE DEMAND SCHEDULE (table)

individual demand curves to  market demand curve

Or, Market Demand Curves are the sum of Individual Demand Curves
 

QUANTITY DEMANDED (Qd): Q of a good that will be bought @ a specific P, other things constant

Ä Represented by a point on demand curve

A certain P & Qd combination

D in P causes a D in Qd = a movement along the demand curve

*Q/per unit of time
 
 

P & Q interact while other variables ceteris paribus

                 Partial vs. General Equilibrium

                            static vs. dynamic

              ENDOGENOUS vs. EXOGENOUS
 

DEMAND: Quantities of a good that will be bought @ various prices, other things constant

Ä The entire demand curve

®If any variable held constant were allowed to D this would shift the entire demand curve
 

Shift Factors     1. Society’s income (population)

of Demand        2. Prices of other goods

                            3. Tastes & Preferences

                            4. Expectations

SHIFT FACTOR: something other than price that affects how much a good is demanded

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 SUPPLY CURVE:

 Law of Supply: Quantity supplied (Qs) of a good is directly related to the good’s price, ceteris paribus

P­ Qs­ or, P¯ Qs¯

*if price should fall firms could switch production to a higher priced good

 SUPPLY SCHEDULE (table)

The sum of the individual firm's supply curves makes the Market
                        Supply Curve

Quantity Supplied: a specific P & Qs combination, represented by a point on the supply curve

Supply: Q that will be brought to the mkt @ various prices *represented by the entire supply curve

Shift Factors     1. Ds in the price of inputs

of Supply               2. Ds in technology

                                3. Ds in supplier’s expectations

                                4. Ds in taxes or subsidies
 

P Ds => DQs: movement along the supply curve

 D shift factor => D Supply: Supply curve shifts
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Chapter 4

 1st DYNAMIC LAW OF SUPPLY & DEMAND

Qs > Qd => excess supply => P¯

Qs < Qd => excess demand => P­
 
 

2nd DYNAMIC LAW OF SUPPLY & DEMAND

the greater the difference between Qd & Qs the greater the pressure for price to D
 
 

3rd DYNAMIC LAW OF SUPPLY & DEMAND

where S=D, Equilibrium, no tendency for P to D

Ädisequilibrium

Price Ceilings & Price Floors

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BUSINESS OWNERSHIP & ORGANIZATION
 
 

Business TypesÞ advantages & disadvantages
 

                                        NUMBERS    SALES

Sole proprietorships          69%            5%

Partnerships                        8%             5%

Corporations                      23%            90%
 
 

Where do households get incomeÞ about 70% comes from wages

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Chapter 15

EXTERNALITIES, MARKET FAILURE & PUBLIC CHOICE
 

EXTERNALITY: An effect on a third party resulting from a transaction between two principals, or, a third party effecting the transaction between two principals.
 
 

FREE RIDER: A person who participates in something for free because others have paid for it.
 
 

PUBLIC GOODS vs. PRIVATE GOODS

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 Chapter 17 (pp 378 - 379)

TYPES OF TAXES:

Progressive

Regressive

Proportional
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Chapter 18

INTERNATIONAL TRADE

WHY TRADE? => its benefits are all around us

Caviar, Coffee & Mangos

WORLD TRADE in 1980 dollars

1928 $245b

1935 $123b

1950 $86b

1990 $2t

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ABSOLUTE ADVANTAGE: producing a level of output using less resources than the competition=> A. Smith

      => specialization

 What if a country doesn’t have an absolute advantage?
 

Does it pay for a country to trade with another country if it has an absolute advantage in all production compared to the other country?
 
 

COMPARATIVE ADVANTAGE: If production costs (opportunity costs) differ then there are gains from trade even if a country has an absolute advantage in producing everything. => David Ricardo
 

                                          U. S.                         Japan

 Hamburgers                        20                               200

Samurai Swords                     5                               100

 *assume they each use an equal amount of inputs to get the unequal output above
 

*Japan has an absolute advantage in the production of both goods => Does it pay to trade?

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U.S. PRODUCTION POSSIBILITY TABLE

                hamburgers                     samurai swords

                        20                                     0

                        16                                     1

                        12                                     2

                        8                                       3

                        4                                       4

                        0                                       5
 
 

Japan’s PRODUCTION POSSIBILITY TABLE

                hamburgers                         samurai swords

                        200                                     0

                        160                                     20

                       120                                     40

                        80                                       60

                        40                                       80

                        0                                         100
 

WHO GAINS FROM TRADE BETWEEN A SMALL

 AND A LARGE COUNTRY? small country!

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 Tariff - tax 

 Quota - quantity limitation

 Voluntary Restraint Agreement - self imposed limit

 Embargo - political trade restriction

 Regulatory Restriction/U.S. beef vs. Euro wine

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REASONS FOR TRADE RESTRICTIONS

1. Unequal internal gains trade=> trade adjustment assistance

2. Haggling by companies

3. Haggling by countries over trade restrictions

4. Specialized production

                    learn by doing/economies of scale

             infant industry argument

5. Macro aspects

6. National Security

7. International politics - embargo

8. Increased revenue f/ tariffs

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REASONS ECONOMISTS SUPPORT FREE TRADE

1. Free trade increases total world output - restrictions can benefit a country as long as others don’t retaliate.

2. Restrictions reduce international competition

50s & 60s => U.S. protection of domestic steel

70s uncompetitive

80s asked for tax break to retool

U.S. Steel purchases Marathon Oil

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Free Trade Associations=> EEC & NAFTA

GATT => WTO => MFN STATUS for members only
 

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