©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 0 Microeconomics 1 oLecturer: Dali Laxton, Junior Researcher at CERGE-EI, Prague (dali.laxton@gmail.com) o oText-book: Mankiw, Principles of Economics, 4th edition (available at the library). ØLectures / Seminars : Friday 13:00-16:50, room S312 ØOffice hours: Online Saturday 4:00-5:00 pm by appointment [USEMAP] ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1 Agenda Ø2 Quizzes (10 points): 1 multiple choice, 1 conceptual question and 1 problem ØFirst Quiz: 15.10.2021 (4th week) Ø2 homeworks (10 points) Ø ØMidterm Exam (40 points): 05.11.2021 Ø ØFinal Exam (40 points): 07.01.2022 Ø © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Masaryk University Microeconomics 1 Dali Laxton Lecture 1 Ten Principles of Economics ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3 •Newspapers and websites are filled with articles related to economics—either directly or indirectly. News headlines may cover topics such as unemployment, deficits, financial markets, health care, Social Security, energy issues, war, global warming, and so on. • Photo by Robert Sexton Why Economics? ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4 •At the professional level: •How can my firm minimize costs and maximize profits? •How much price should I charge and how much should I produce? • Why Economics? ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 5 •At the personal level: •How can I maximize my average GPA given time constraints? •Should I quit my job and pursue university education? •What is a marginal benefit of calling my girlfriend compared to the cost of spent time? • Why Economics? ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 6 Why Economics? •The table shows gross wages in the Czech Republic before paying pension and insurance outlets. The data is retrieved from https://www.euroeducation.cz/en/content/36/20. It pays off J ‹#› © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Lecture Today •Introduction/revision of fundamental principles of economics •What kinds of questions does economics address? •What are the principles of how people make decisions? •What are the principles of how people interact? •How do Economists think? Screen Shot 2013-09-29 at 9.52.07 AM.png ‹#› © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Readings •Mankiw, Principles of Economics, Chapter 1 Screen Shot 2013-09-29 at 9.52.07 AM.png ‹#› © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. What Economics Is All About §Scarcity: the limited nature of society’s resources §Economics: the study of how society manages its scarce resources, e.g. §how people decide what to buy, how much to work, save, and spend §how firms decide how much to produce, how many workers to hire §how society decides how to divide its resources between national defense, consumer goods, protecting the environment, and other needs [USEMAP] 0 [USEMAP] 0 The principles of HOW PEOPLE MAKE DECISIONS ©lithian/Shutterstock.com ‹#› © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. PRINCIPLE 1 People Face Tradeoffs •All decisions involve tradeoffs. Examples: §Going to a party the night before your midterm leaves less time for studying. §Having more money to buy stuff requires working longer hours, which leaves less time for leisure. §Protecting the environment requires resources that could otherwise be used to produce consumer goods. [USEMAP] 0 ‹#› © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. PRINCIPLE 1 People Face Tradeoffs §Society faces an important tradeoff: efficiency vs. equality §Efficiency: when society gets the most from its scarce resources §Equality: when prosperity is distributed uniformly among society’s members §Tradeoff: To achieve greater equality, could redistribute income from wealthy to poor. But this reduces incentive to work and produce, shrinks the size of the economic “pie.” [USEMAP] 0 ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 13 •Even though designating these parking spaces for disabled drivers may not be an efficient use of scarce parking spaces (because they are often not used), many believe it is fair to give these drivers a convenient spot. The debate between efficiency and equality is often heated. • ‹#› © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. PRINCIPLE 2 The Cost of Something Is What You Give Up to Get It §Making decisions requires comparing the costs and benefits of alternative choices. §The opportunity cost of any item is whatever must be given up to obtain it. §It is the relevant cost for decision making. § ‹#› © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. PRINCIPLE 2 The Cost of Something Is What You Give Up to Get It • Examples: The opportunity cost of… –…waiting in line for “free” event. –…studying at university – not only tuition fee and living costs but also foregone wages. –Question: –What are “best things” that are “free”? Are they really free? ‹#› © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. PRINCIPLE 3 Rational People Think at the Margin •Rational people §systematically and purposefully do the best they can to achieve their objectives. §make decisions by evaluating costs and benefits of marginal changes, incremental adjustments to an existing plan. ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 17 •During rush hour some drivers will switch into and out of lanes if they perceive one lane is moving faster than another. This is a marginal adjustment. The same is true of lines in a supermarket. People are constantly weighing the marginal benefits and marginal costs of changing lanes and/or lines. • ‹#› © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. PRINCIPLE 3 Rational People Think at the Margin •Other Examples: §When a student considers whether to go to college for an additional year, he compares the fees & foregone wages to the extra income he could earn with the extra year of education. §When a manager considers whether to increase output, she compares the cost of the needed labor and materials to the extra revenue. § VS. ‹#› © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. PRINCIPLE 4 People Respond to Incentives §Incentive: something that induces a person to act, i.e. the prospect of a reward or punishment. §Rational people respond to incentives. • Examples: §When gas prices rise, consumers buy more hybrid cars. §When cigarette taxes increase, teen smoking falls. ‹#› © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. ACTIVE LEARNING 1 Applying the principles •Work in pairs for 3 minutes! sidebar-yellow copy.png ‹#› © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. ACTIVE LEARNING 1 Applying the principles •You are selling your old car. You have already spent 15,000 CZK on repairs. •At the last minute, the transmission dies. •You can pay 10,000 CZK to have it repaired, or sell the car “as is.” •In each of the following scenarios, should you have the transmission repaired? Explain. –A. The value of the car is 40,000 CZK if the transmission works and 25,000 CZK if it doesn’t –B. The value of the car is 45,000 CZK if the transmission works and 38,000 CZK if it doesn’t sidebar-yellow copy.png ‹#› © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. ACTIVE LEARNING 1 Answers •Cost of fixing transmission = 10,000 CZK –A. If transmission works, the value of the car is 40,000 CZK and is 25,000 CZK if it doesn’t – Benefit of fixing transmission = 15,000 CZK (40,000 – 25,000). – Get the transmission fixed. –B. If transmission works, the value of the car is 45,000 CZK and is 38,000 CZK if it doesn’t – Benefit of fixing the transmission is only 7,000 CZK. – Do not pay 10,000 CZK to fix it. sidebar-yellow copy.png ‹#› © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. ACTIVE LEARNING 1 Observations §The 15,000 CZK you previously spent on repairs is irrelevant. What matters is the cost and benefit of the marginal repair (the transmission). §The change in incentives from scenario A to scenario B caused your decision to change. sidebar-yellow copy.png [USEMAP] 0 The principles of HOW PEOPLE INTERACT ©Pressmaster/Shutterstock.com ‹#› © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. PRINCIPLE 5 Trade Can Make Everyone Better Off §Rather than being self-sufficient, people can specialize in producing one good or service and exchange it for other goods. §Countries also benefit from trade and specialization: §Get a better price abroad for goods they produce §Buy other goods more cheaply from abroad than could be produced at home ‹#› © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. PRINCIPLE 6 Markets Are Usually A Good Way to Organize Economic Activity §Market: a group of buyers and sellers (need not be in a single location) §“Organize economic activity” means determining §what goods to produce §how to produce them §how much of each to produce §who gets them ‹#› © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. PRINCIPLE 6 Markets Are Usually A Good Way to Organize Economic Activity §A market economy allocates resources through the decentralized decisions of many households and firms as they interact in markets. §Famous insight by Adam Smith in The Wealth of Nations (1776): – Each of these households and firms acts as if “led by an invisible hand” to promote general economic well-being. ‹#› © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. PRINCIPLE 6 Markets Are Usually A Good Way to Organize Economic Activity §The invisible hand works through the price system: §The interaction of buyers and sellers determines prices. §Each price reflects the good’s value to buyers and the cost of producing the good. §Prices guide self-interested households and firms to make decisions that, in many cases, maximize society’s economic well-being. §In many cases better option than centralized economy. ‹#› © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. PRINCIPLE 7 Governments Can Sometimes Improve Market Outcomes §Important role for government: enforce property rights (with police, courts) §People are less inclined to work, produce, invest, or purchase if large risk of their property being stolen. ‹#› © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. PRINCIPLE 7 Governments Can Sometimes Improve Market Outcomes §Market failure: when the market fails to allocate society’s resources efficiently §Causes of market failure: §Externalities, when the production or consumption of a good affects bystanders (e.g. pollution) §Market power, a single buyer or seller has substantial influence on market price (e.g. monopoly) §Public policy may promote efficiency. ‹#› © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. PRINCIPLE 7 Governments Can Sometimes Improve Market Outcomes §Govt may alter market outcome to promote equity. §If the market’s distribution of economic well-being is not desirable, tax or welfare policies can change how the economic “pie” is divided. • [USEMAP] 0 The principles of HOW THE ECONOMY AS A WHOLE WORKS ©nopporn/Shutterstock.com ‹#› © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. PRINCIPLE 8 A Country’s Standard of Living Depends on Its Ability to Produce Goods & Services §Huge variation in living standards across countries and over time: §Average income in rich countries is more than ten times average income in poor countries. §The U.S. standard of living today is about eight times larger than 100 years ago. ‹#› © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. PRINCIPLE 8 A Country’s Standard of Living Depends on Its Ability to Produce Goods & Services §The most important determinant of living standards: productivity, the amount of goods and services produced per unit of labor. §Productivity depends on the equipment, skills, and technology available to workers. §Other factors (e.g., labor unions, competition from abroad) have far less impact on living standards. ‹#› © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. PRINCIPLE 9 Prices Rise When the Government Prints Too Much Money §Inflation: increases in the general level of prices. §In the long run, inflation is almost always caused by excessive growth in the quantity of money, which causes the value of money to fall. §The faster the govt creates money, the greater the inflation rate. ‹#› © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. PRINCIPLE 10 Society Faces a Short-run Tradeoff Between Inflation and Unemployment §In the short-run (1–2 years), many economic policies push inflation and unemployment in opposite directions. §Other factors can make this tradeoff more or less favorable, but the tradeoff is always present. ‹#› © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The Economist as Scientist §Economists play two roles: –1. Scientists: try to explain the world –2. Policy advisors: try to improve it §In the first, economists employ the scientific method, the dispassionate development and testing of theories about how the world works. ‹#› © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The Economist as Scientist §Working with data § § § § • • ‹#› © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The Economist as Scientist §Providing explanations by building up models. §Not these ones J • § § § § • • ‹#› © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Assumptions & Models §Model: a highly simplified representation of a more complicated reality. Economists use models to study economic issues. §Assumptions simplify the complex world, make it easier to understand. §Example: To study international trade, assume two countries and two goods. • Unrealistic, but simple to learn and gives useful insights about the real world. ‹#› © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The Role of Assumptions §Assumptions §Can simplify the complex world §Make it easier to understand §The art in scientific thinking: deciding which assumptions to make §Different assumptions §To answer different questions ‹#› © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Some Familiar Models •A road map ©wavebreakmedia/Shutterstock.com ‹#› © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Some Familiar Models •A model of human anatomy from high school biology class ©Accord/Shutterstock.com ‹#› © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Some Familiar Models •A model airplane ©Olga Rosi/Shutterstock.com ‹#› © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Some Familiar Models •The model teeth at the dentist’s office Don’t forget to floss! ©ittipon/Shutterstock.com ‹#› © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Effective Models §Includes characteristics that are essential to explore research question. §Simplifies reality to increase our understanding – neglects redundant dimensions of reality. § •Most economic models §Diagrams and equation •Ceteris Paribus analysis – concentrating in change only one variable fixing all others. • • Summary •The principles of decision making are: •People face tradeoffs. •The cost of any action is measured in terms of foregone opportunities. •Rational people make decisions by comparing marginal costs and marginal benefits. •People respond to incentives. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Screen Shot 2013-09-29 at 9.52.07 AM.png Summary •The principles of interactions among people are: •Trade can be mutually beneficial. •Markets are usually a good way of coordinating trade. •Govt can potentially improve market outcomes if there is a market failure or if the market outcome is inequitable. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Screen Shot 2013-09-29 at 9.52.07 AM.png Summary •The principles of the economy as a whole are: •Productivity is the ultimate source of living standards. •Money growth is the ultimate source of inflation. •Society faces a short-run tradeoff between inflation and unemployment. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Screen Shot 2013-09-29 at 9.52.07 AM.png ‹#› © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Next Lecture §Demand and Supply Analysis §Readings: Mankiw, Chapter 1; Production Possibility Frontier part and Appendix from Chapter 2 50 Screen Shot 2013-09-29 at 9.52.07 AM.png The PPF •Production possibilities frontier –A graph: combinations of output that the economy can possibly produce –Given the available •Factors of production and technology –Example: •Two goods: computers and wheat •One resource: labor (measured in hours) •Economy has 50,000 labor hours per month available for production • 51 © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use. > PPF Example Producing one computer requires 100 hours labor. Producing one ton of wheat requires 10 hours labor. 52 © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use. 5,000 0 4,000 100 2,500 250 1,000 400 50,000 0 40,000 10,000 25,000 25,000 10,000 40,000 0 500 0 50,000 E D C B A Wheat Computers Wheat Computers Production Employment of labor hours © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Active Learning 1 Points off the PPF •On the graph above, find the point that represents (100 computers, 3000 tons of wheat), label it F. –Would it be possible for the economy to produce this combination of the two goods? Why or why not? •Next, find the point that represents (300 computers, 3500 tons of wheat), label it G. –Would it be possible for the economy to produce this combination of the two goods? 54 © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use. > Active Learning 1 Answers •Point F: 100 computers, 3000 tons wheat •Requires 40,000 hours of labor •Possible but not efficient: could get more of either good without sacrificing any of the other • 55 © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use. F Active Learning 1 Answers •Point G: 300 computers, 3500 tons wheat •Requires 65,000 hours of labor. •Not possible because the economy only has 50,000 hours 56 © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use. G The PPF: What We Know So Far •Points on the PPF (like A – E): possible –Efficient: all resources are fully utilized •Points under the PPF (like F): possible –Not efficient: some resources are underutilized (e.g., workers unemployed, factories idle) •Points above the PPF (like G) –Not possible © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use. 57 > The PPF •Moving along a PPF –Involves shifting resources from the production of one good to the other •Society faces a tradeoff –Getting more of one good requires sacrificing some of the other •The slope of the PPF –The opportunity cost of one good in terms of the other – © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use. 58 > The PPF and Opportunity Cost The slope of a line equals the “rise over the run.” Opportunity cost of 1 computer = 10 tons of wheat. 59 © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use. –1000 100 slope = = –10 Active Learning 2 PPF and Opportunity Cost •In which country is the opportunity cost of cloth lower? 60 © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use. ENGLAND FRANCE > Active Learning 2 Answers •England, because its PPF is not as steep as France’s 61 © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use. ENGLAND FRANCE > Economic Growth and the PPF With additional resources or an improvement in technology, the economy can produce more computers, more wheat, or any combination in between. 62 © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use. Economic growth shifts the PPF outward. The Shape of the PPF •Shape of the PPF –Straight line: constant opportunity cost •Previous example: the opportunity cost of 1 computer is 10 tons of wheat – Bowed outward: increasing opportunity cost •As more units of a good are produced, we need to give up increasing amounts of the other good produced • © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use. 63 > Why the PPF Might Be Bowed Outward As the economy shifts resources from beer to mountain bikes: PPF becomes steeper and the opportunity cost of mountain bikes increases. 64 © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use. Mountain Bikes Why the PPF Might Be Bowed Outward At point A, most workers are producing beer, even those who are better suited to building bikes. So, do not have to give up much beer to get more bikes. 65 © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use. Mountain Bikes A At A, opportunity cost of mountain bikes is low. Why the PPF Might Be Bowed Outward At B, most workers are producing bikes. The few left in beer production are the best brewers. Producing more bikes would require shifting some of the best brewers away from beer production causing a big drop in beer output. 66 © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use. Mountain Bikes A B At B, opportunity cost of mountain bikes is high. Why the PPF Might Be Bowed Outward •The PPF is bowed outward when: –Different workers have different skills –Different opportunity costs of producing one good in terms of the other –There is some other resource, or mix of resources with varying opportunity costs •E.g., different types of land suited for different uses • 67 © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use. > The Economist as Policy Adviser •Positive statements: descriptive –Attempt to describe the world as it is –Confirm or refute by examining evidence: “Minimum-wage laws cause unemployment” •Normative statements: prescriptive –Attempt to prescribe how the world should be: “The government should raise the minimum wage” © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use. 68 > Active Learning 3 Positive vs. Normative •Which of these statements are “positive” and which are “normative”? How can you tell the difference? a.Prices rise when the government increases the quantity of money. b.The government should print less money. c.A tax cut is needed to stimulate the economy. d.An increase in the price of burritos will cause an increase in consumer demand for music downloads. 69 © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use. > Active Learning 3 Answers a.Prices rise when the government increases the quantity of money. • Positive – describes a relationship, could use data to confirm or refute. • b.The government should print less money. – Normative – this is a value judgment, cannot be confirmed or refuted. – 70 © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use. > Active Learning 3 Answers c.A tax cut is needed to stimulate the economy. • Normative – another value judgment. • d.An increase in the price of burritos will cause an increase in consumer demand for music downloads • Positive – describes a relationship. •Note that a statement need not be true to be positive. • 71 © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use. >