Copyright © 2006 South-Western/Thomson Learning. All rights reserved. ●Education: ♦B.A. in Economics –UCSC ♦M.S. and PhD in Economics –UW Madison ●Background:

Copyright © 2006 South-Western/Thomson Learning. All rights reserved.

● Education:♦ B.A. in Economics –UCSC

♦ M.S. and PhD in Economics –UW Madison

● Background:♦ Bass Lake

● Teaching Experience:♦ ECON 160, 310, and 405, 500 & BUS 302

● Education:♦ B.A. in Economics –UCSC

♦ M.S. and PhD in Economics –UW Madison

● Background:♦ Bass Lake

● Teaching Experience:♦ ECON 160, 310, and 405, 500 & BUS 302

Leah MarcalLeah Marcal


● Research:♦ College Assessment Director

■Employer, alumni, and student satisfaction surveys ■Returns to college education

● Interests (before I had twins ):♦ Hiking

♦ Texas Hold’em

● Research:♦ College Assessment Director

■Employer, alumni, and student satisfaction surveys ■Returns to college education

● Interests (before I had twins ):♦ Hiking

♦ Texas Hold’em

Leah Marcal (cont.)Leah Marcal (cont.)


● Name

● Undergraduate Major

● Employment

● Favorite movie

● Name

● Undergraduate Major

● Employment

● Favorite movie

Your Introductions:Your Introductions:


SyllabusSyllabus

● Preparation:♦ Strong working knowledge of high school

algebra and geometry

● Textbook: ♦ Baumol and Blinder, Economics: Principles

and Policy, 11th edition (2010)

● Preparation:♦ Strong working knowledge of high school

algebra and geometry

● Textbook: ♦ Baumol and Blinder, Economics: Principles

and Policy, 11th edition (2010)


Syllabus (cont.)Syllabus (cont.)

● Review: ♦ Class website:

http://www.csun.edu/~lem50734/econ500index.html■PPT slides for each lecture■Answers to selected questions at the end of each

chapter■Online practice quizzes

● Review: ♦ Class website:

http://www.csun.edu/~lem50734/econ500index.html■PPT slides for each lecture■Answers to selected questions at the end of each

chapter■Online practice quizzes



● 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

● 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



● Office Hours: ♦ JH 4250 on Tues. from 6:00 to 6:50; or by

appointment

♦ Email your questions: [email protected]

● Classes: ♦ 12 meetings: 10 lectures and 2 exams

● Office Hours: ♦ JH 4250 on Tues. from 6:00 to 6:50; or by

appointment

♦ Email your questions: [email protected]

● Classes: ♦ 12 meetings: 10 lectures and 2 exams

Date Topic Chapter

08/31 Scarcity and Cost 3

09/04 Supply and Demand 4

09/07 Consumer Demand and Elasticity 5 & 6

09/14 Production and Cost; Output and Price 7 & 8

09/18 Perfect Competition 10

09/21 Midterm ---

09/28 Monopoly 11

10/05 Between Competition and Monopoly 12

10/09 Macroeconomics and Aggregate Demand 22 & 25

10/12Aggregate Demand and Supply; Fiscal Policy

26, 27, & 28

10/19 Money and Monetary Policy 29 & 30

10/23 Final Exam ---

1

The Fundamental Economic Problem: Scarcity and Choice


Scarcity and ChoiceScarcity and Choice

● Central problem in economics: how to chose among competing alternatives given the limited resources of decision makers

● Central problem in economics: how to chose among competing alternatives given the limited resources of decision makers

Decision-maker Alternatives

CA state gov. Roads or schools

Fed gov. Defense or SSI

Households New car or trip

Firms PCs or office furniture



● 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?

● 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?



● 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

● 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

● 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

● 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

Opportunity Cost and Money CostOpportunity Cost and Money Cost

Copyright© 2006 South-Western/Thomson Learning. All rights reserved.


Scarcity and Choice for a Single FirmScarcity 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

● 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

TABLE 1. PPF for a FarmerTABLE 1. PPF for a Farmer


FIGURE 1. PPF for a FarmerFIGURE 1. PPF for a Farmer

Attainable region So

yb

ea

ns

Wheat

E

D

C

B

A Unattainable region

60 65 52 38 30 20 10 0

10

20

30

40



● 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.

● 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.

Features of the PPFFeatures of the PPF


♦ 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

♦ 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

Principle of Increasing CostsPrinciple of Increasing Costs


FIGURE 2. PPF without Specialized Resources

FIGURE 2. PPF without Specialized Resources

D

C

B

A

Brown Shoes

Bla

ck S

ho

es

50

40

30

20

10

0 50 40 30 20 10


● 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

● 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

Principle of Increasing CostsPrinciple of Increasing Costs



● 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

● 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

Scarcity and Choice for the Entire SocietyScarcity and Choice for the Entire Society

FIGURE 3. PPF for Entire EconomyFIGURE 3. PPF for Entire Economy

Th

ou

san

ds

of

Au

tom

ob

iles

per

Yea

r

Missiles per Year

C

F

E

D

B

500 400 300 200 100

0

100

200

300

400

500

600

700



Scarcity and Choice for the Entire SocietyScarcity 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.

● 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.


Economic GrowthEconomic 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

● ↑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


Economic GrowthEconomic 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?

● 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?

Figure 4. Growth in the U.S. and AsiaFigure 4. Growth in the U.S. and Asia

F

F

G

G

Capital Goods

(a) United States

This year’s production possibilities

Next year’s production possibilities

g

g

f

f

Capital Goods

(b) Asia

Next year’s production possibilities

A

BCo

nsu

mp

tio

n G

oo

ds

Co

nsu

mp

tio

n G

oo

ds

N

This year’s production possibilities



EfficiencyEfficiency

● 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

● 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

FIGURE 5. PPF and EfficiencyFIGURE 5. PPF and Efficiency

Th

ou

san

ds

of

Au

tom

ob

iles

per

Yea

r

Missiles per Year

C

F

E

D

B

500 400 300 200 100

0

100

200

300

400

500

600

700

A


Point A is inefficient


EfficiencyEfficiency

● Sources of inefficiency:♦ Unemployment

♦ Inputs assigned to the wrong task

♦ Discrimination

● Sources of inefficiency:♦ Unemployment

♦ Inputs assigned to the wrong task

♦ Discrimination


Three Coordination Tasks of Any EconomyThree 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

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


● 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.”

● 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.”

Efficiency in ProductionEfficiency 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.”

● 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.”



● 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

● 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



● 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?

● 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?


Comparative AdvantageComparative 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.

● 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.


Comparative AdvantageComparative 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.

● 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.


Voluntary ExchangeVoluntary 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.

● 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.


Voluntary ExchangeVoluntary 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

● 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


Production DecisionsProduction 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.

● 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.


Distribution of GoodsDistribution 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?

● 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?

Documents

Copyright © 2006 South-Western/Thomson Learning. All rights reserved. ●Education: ♦B.A. in Economics –UCSC ♦M.S. and PhD in Economics –UW Madison ●Background: