Leah Marcal Education B A in Economics UCSC

Leah Marcal ● Education: ♦ B. A. in Economics –UCSC ♦ M. S. and Ph. D in Economics –UW Madison ● Background: ♦ Bass Lake ● Teaching Experience: ♦ ECON 160, 310, and 406 & BUS 302 Copyright © 2006 South-Western/Thomson Learning. All rights reserved.

Leah Marcal (cont. ) ● Research: ♦ College Assessment Director ■Employer, alumni, and student satisfaction surveys ■Returns to college education ● Interests: ♦ Hiking ♦ Texas Hold’em Copyright © 2006 South-Western/Thomson Learning. All rights reserved.

Your Introductions: ● Name ● Major ● Employment ● Favorite movie Copyright © 2006

Syllabus ● Preparation: ♦ Strong working knowledge of high school algebra and geometry ● Textbook: ♦ Baumol and Blinder, Microeconomics: Principles and Policy, 11 th edition (2009) Copyright © 2006 South-Western/Thomson Learning. All rights reserved.

Syllabus (cont. ) ● Review: ♦ Class website: http: //www. csun. edu/~lem 50734/ ■PPT slides for each lecture ■Answers to selected questions at the end of each chapter ■Online practice quizzes Copyright © 2006 South-Western/Thomson Learning. All rights reserved.

Syllabus (cont. ) ● Assessment: ♦ In-class quizzes (10%) ■Drop lowest score ♦ Midterm (40%) ♦ Final (50%) ■Contain T/F, multiple choice, and essay questions ■No make-up quizzes or exams Copyright © 2006 South-Western/Thomson Learning. All rights reserved.

Syllabus (cont. ) ● Office Hours: ♦ JH 4250 on Tues. and Wed. 4: 30 to 5: 30; or by appointment ♦ Email your questions: leah. marcal@csun. edu ● Classes: ♦ 13 meetings: 11 lectures and 2 exams ♦ 1 chapter covered per day Copyright © 2006 South-Western/Thomson Learning. All rights reserved.

Date Topic Chapter 01/04 Scarcity and Cost 3 01/05 01/06 Supply and Demand Consumer Choice and Market Demand 4 5 01/07 01/08 01/09 01/11 01/12 01/13 01/14 01/15 01/16 Demand Elasticity Production and Cost Output, Price, and Profit Midterm Exam Perfect Competition Monopoly Between Competition and Monopoly Price System and Free Markets International Trade 6 7 8 --10 11 12 14 22 01/17 Final Exam --- 8

1 The Fundamental Economic Problem: Scarcity and Choice

Scarcity and Choice ● Central problem in economics: how to chose among competing alternatives given the limited resources of decision makers Decision-maker CA state gov. Fed gov. Households Firms Alternatives Roads or schools Defense or SSI New car or trip PCs or office furniture Copyright © 2006 South-Western/Thomson Learning. All rights reserved.

Scarcity and Choice ● All resources are scarce, so a decision to have more of one thing is a decision to have less of something else. ● Cost of any decision is its opportunity cost – value of the next best alternative that is given up. ● What is the cost of producing one car? Copyright © 2006 South-Western/Thomson Learning. All rights reserved.

Scarcity and Choice ● Goods are scarce because the resources (land, labor, capital, and fuel) that are used to produce goods are scarce. ● How does society decide whether cars or refrigerators are produced? ♦ Forces of S and D Copyright © 2006 South-Western/Thomson Learning. All rights reserved.

Opportunity Cost and Money Cost ● Opportunity cost is closely related to money cost if markets function properly ♦ E. g. , D for steel → high P for steel → high opportunity cost of car → high P for cars ● No explicit P for some valuable resources – like time ● TC = money cost + opportunity cost ♦ E. g. , college education Copyright© 2006 South-Western/Thomson Learning. All rights reserved.

Scarcity and Choice for a Single Firm ● Production Possibilities Frontier ♦ PPF = graph showing different combinations of output for a fixed number of inputs ♦ More of one good less of another ♦ Illustrates opportunity costs in production Copyright © 2006 South-Western/Thomson Learning. All rights reserved.

TABLE 1. PPF for a Farmer Copyright© 2006 South-Western/Thomson Learning. All rights reserved.

Soybeans FIGURE 40 30 20 1. PPF for a Farmer A B Attainable region

Features of the PPF ● Negatively sloped ♦ ● ● ↑ Q wheat by moving resources out of soybean production and into wheat production Slope = opportunity cost Bowed outward ♦ ↑ Opportunity cost of wheat as ↑ wheat production ■ Why? Inputs tend to be specialized. E. g. , some land may be better suited for wheat vs. soybean production. Copyright © 2006 South-Western/Thomson Learning. All rights reserved. Copyright© 2006 South-Western/Thomson Learning. All rights reserved.

Principle of Increasing Costs ♦ Principle of increasing costs: production of one good opportunity cost of producing another unit ♦ PPF is bowed outward ♦ Reason: inputs tend to be specialized ■If not, then PPF is a straight line Copyright© 2006 South-Western/Thomson Learning. All rights reserved.

FIGURE 2. PPF without Specialized Resources 50 Black Shoes 40 A B 30 C

Principle of Increasing Costs ● Straight line PPF: ♦ Constant opportunity costs ♦ Inputs are not specialized ■Above, inputs used to produce black shoes are equally well suited to produce brown shoes Copyright© 2006 South-Western/Thomson Learning. All rights reserved.

Scarcity and Choice for the Entire Society ● Use PPFs to show scarcity and choice for the entire economy ● PPF for a country depends on: ♦ Resources ♦ Skills of its labor force ♦ Technology ♦ Willingness to work ♦ Past investments in factories, educ. , and research Copyright © 2006 South-Western/Thomson Learning. All rights reserved.

FIGURE 3. PPF for Entire Economy Thousands of Automobiles per Year 700 B 600 D 500 E 400 300 F 200 100 C 0 100 200 300 400 500 Missiles per Year Copyright© 2006 South-Western/Thomson Learning. All rights reserved.

Scarcity and Choice for the Entire Society ● B → D: give up 150, 000 cars to get 300 missiles. ● F → C: give up 200, 000 cars to get 50 missiles. ● ↑ Opportunity cost of military strength as more resources that are suited for car prod. are forced into missile prod. Copyright © 2006 South-Western/Thomson Learning. All rights reserved.

Economic Growth ● ↑resources or technology shifts the PPF outward ● Factors that promote growth: ♦ ↑ labor skills ♦ Technological advances ♦ Investments in K –robots, computers, and factories ● Grow faster by investing in educ. , R&D, and new factories and equipment Copyright © 2006 South-Western/Thomson Learning. All rights reserved.

Economic Growth ● Resources can be used to produce C goods or K goods ♦ E. g. , steel used to produce cars instead of assembly lines; workers used to produce clothing instead of attending school. ● Investment in K goods shifts out the PPF ● What is the cost of economic growth? Copyright © 2006 South-Western/Thomson Learning. All rights reserved.

Figure 4. Growth in the U. S. and Asia G N A Consumption Goods Next year’s production possibilities This year’s production possibilities F G Capital Goods (a) United States g Consumption Goods F Next year’s production possibilities This year’s production possibilities f B f g Capital Goods (b) Asia Copyright© 2006 South-Western/Thomson Learning. All rights reserved.

Efficiency ● Efficiency = no waste ● Economy produces max. output using available resources ● Efficiency and the PPF ♦ Any point on the boundary is efficient ■Efficiency does not indicate which point is best ♦ Any point on the interior is inefficient Copyright © 2006 South-Western/Thomson Learning. All rights reserved.

FIGURE 5. PPF and Efficiency Thousands of Automobiles per Year 700 Point A is inefficient B 600 D 500 A 400 E 300 F 200 100 C 0 100 200 300 400 Missiles per Year 500 28 Copyright© 2006 South-Western/Thomson Learning. All rights reserved.

Efficiency ● Sources of inefficiency: ♦ Unemployment ♦ Inputs assigned to the wrong task

Three Coordination Tasks of Any Economy 1. How to utilize resources efficiently –get on the boundary of the PPF 2. What combinations of goods to produce – which point on the PPF 3. How much of each good to distribute to each person –who gets what ♦ Goals can be accomplished by a central planner or a price system Copyright © 2006 South-Western/Thomson Learning. All rights reserved.

Efficiency in Production ● Division of Labor: each person specializes in the production of a particular good or task ● Adam Smith in Wealth of Nations (1776) describes specialization in a pin factory: ♦ “One man draws out the wire, another straightens it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires 2 or 3 distinct operations; to whiten the pins is another; it is even a trade by itself to put them into the paper. ” Copyright © 2006 South-Western/Thomson Learning. All rights reserved.

Efficiency in Production ● Smith observed that this division of labor increased the productivity of the workers as a whole stating: ■“I have seen a manufacturing plant where 10 men were employed. Those 10 men could make among them upwards of 48, 000 pins a day. But if they had all worked separately and independently, they certainly could not each of them have made 20, perhaps not 1 pin in a day. ” Copyright © 2006 South-Western/Thomson Learning. All rights reserved.

Efficiency in Production ● Imagine a world without specialization ♦ You would have to produce all of your own clothing, food, shelter, and transportation. ● So what should you specialize in? ■Doing what you do best and trading with others Copyright © 2006 South-Western/Thomson Learning. All rights reserved.

Efficiency in Production ● Example: a world-class neurosurgeon is the best car mechanic in Los Angeles. ♦ Should she repair her own car? ♦ What is the opportunity cost of having her spend one hour repairing her car? Copyright © 2006 South-Western/Thomson Learning. All rights reserved.

Comparative Advantage ● Principle of comparative advantage is illustrated here. ● Neurosurgeon specializes in surgery despite her advantage as a car mechanic because she has an even greater advantage as a surgeon. ● She suffers some loss by letting a lesser skilled mechanic repair her car. Yet, she makes up for that loss by the income gained from surgery. Copyright © 2006 South-Western/Thomson Learning. All rights reserved.

Comparative Advantage ● Comparative advantage applies to countries. ● Standard of living in the U. S. would be lower if it tried to produce everything itself. ♦ Example: U. S. could produce winter roses and computer software. ♦ U. S. is better off specializing in software and buying winter roses from Latin America where the opportunity cost of roses is lower. Copyright © 2006 South-Western/Thomson Learning. All rights reserved.

Voluntary Exchange ● Specialization leads to exchange ♦ Prior to industrial revolution, workers produced what they consumed. After, workers who produced shoes needed to trade with others who produced food or clothing. ● Voluntary exchange between 2 parties must make both parties better off. ♦ Even though no additional goods are created in the act of trading, welfare of society is improved. Individuals can trade what they have for what they want. Copyright © 2006 South-Western/Thomson Learning. All rights reserved.

Voluntary Exchange ● Why don’t we trade goods for goods? Why do we need money? ■ Search costs ● Recall: focus is efficiency in production. Sidetracked: division of labor and specialization → comparative advantage → exchange ● Firms are also encouraged by the profit motive not to waste inputs → efficiency in production Copyright © 2006 South-Western/Thomson Learning. All rights reserved.

Production Decisions ● Task (2) –which point on the PPF –is accomplished by the forces of S and D. ♦ Example: if consumers want more fuel-efficient cars, automakers must produce smaller, more efficient cars. Copyright © 2006 South-Western/Thomson Learning. All rights reserved.

Distribution of Goods ● Task (3) –who gets what –is accomplished by consumers purchasing what they like best given their income. ● Ability to purchase goods is not equally distributed. ♦ Highly skilled workers and individuals who own valuable resources can sell their labor or resources at high prices giving them greater incomes. ● Should we redistribute income so that everyone can consume the same amount of goods and services? Copyright © 2006 South-Western/Thomson Learning. All rights reserved.