1 chapter 2 some tools of the economist. 2 overview how trade creates value how trade creates value...
TRANSCRIPT
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Chapter 2Chapter 2
Some Tools of the EconomistSome Tools of the Economist
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OverviewOverview
How trade creates valueHow trade creates value The importance and incentives of The importance and incentives of
property rightsproperty rights The production possibilities curveThe production possibilities curve The law of comparative advantageThe law of comparative advantage Capitalism vs. SocialismCapitalism vs. Socialism
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Is trade a zero-sum game?Is trade a zero-sum game?
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Trade Creates ValueTrade Creates Value
Because the value of goods is Because the value of goods is subjective, voluntary trade creates subjective, voluntary trade creates valuevalue
Ex. The Candy Game!Ex. The Candy Game!
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Trade Creates ValueTrade Creates Value
How trade creates value…How trade creates value…
1. When individuals engage in voluntary 1. When individuals engage in voluntary exchange, both parties are made better exchange, both parties are made better offoff
2. By channeling goods and resources to 2. By channeling goods and resources to those who value them most, trade those who value them most, trade creates value and increases the wealth creates value and increases the wealth created by a society’s resources.created by a society’s resources.
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How Trade Leads to Economic How Trade Leads to Economic ProgressProgress
1. Gains from specialization and 1. Gains from specialization and division of labordivision of labor
2. Gains from mass production 2. Gains from mass production methods methods
3. Gains from innovation3. Gains from innovation
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Creation of WealthCreation of Wealth
The process by which some people The process by which some people become rich will make everybody become rich will make everybody richer.richer.
Ex. Bill GatesEx. Bill Gates
Wrong Wrong Right! Right!
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Transaction CostsTransaction Costs
Transaction CostsTransaction Costs: The time, effort, : The time, effort, and other resources needed to and other resources needed to search out and complete an search out and complete an exchange.exchange.
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Transaction CostsTransaction Costs
Leaves a role for middleman....Leaves a role for middleman....
Middleman: Middleman: A person who buys and A person who buys and sells goods or services or arranges sells goods or services or arranges trades. A middleman reduces trades. A middleman reduces transaction costs. transaction costs.
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Importance of Property RightsImportance of Property Rights
Private property rights involve:Private property rights involve:
1. The right to exclusive use of the 1. The right to exclusive use of the propertyproperty
2. Legal protection against invasion 2. Legal protection against invasion from other individualsfrom other individuals
3. The right to sell, transfer, 3. The right to sell, transfer, exchange, or mortgage the exchange, or mortgage the propertyproperty
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4 incentives of property rights4 incentives of property rights
1. Incentive to use resources in ways 1. Incentive to use resources in ways that are considered beneficial to that are considered beneficial to others.others.
ex. Empty lotex. Empty lot
owners bear the cost of ignoring the owners bear the cost of ignoring the wishes of others.wishes of others.
ex. Neutral colorsex. Neutral colors
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4 incentives of property rights4 incentives of property rights
2. Private owners have an incentive to 2. Private owners have an incentive to care for and manage what they owncare for and manage what they own
ex. How do you drive a rental car ex. How do you drive a rental car compared to your own car?compared to your own car?
ex. Berry’s Bikesex. Berry’s Bikes
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4 incentives of property rights4 incentives of property rights
3. Private owners have an incentive to 3. Private owners have an incentive to conserve for the futureconserve for the future
ex. Popcorn at the moviesex. Popcorn at the movies
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4 incentives of property rights4 incentives of property rights
4. Private owners have an incentive to 4. Private owners have an incentive to make sure their property does not make sure their property does not damage your propertydamage your property
ex. Keeping your dog on a leashex. Keeping your dog on a leash
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Private Property RightsPrivate Property Rights
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Property Rights and DevelopmentProperty Rights and Development
Lack of property rights = lack of Lack of property rights = lack of economic progresseconomic progress
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Production Possibilities Curve Production Possibilities Curve (PPC)(PPC)
PPCPPC: outlines all possible combinations : outlines all possible combinations of total output that could be produced, of total output that could be produced, assuming a:assuming a:
1. fixed amount of productive 1. fixed amount of productive resourcesresources
2. given amount of technical 2. given amount of technical knowledgeknowledge
3. full and efficient use of resources3. full and efficient use of resources
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Production Possibilities Curve Production Possibilities Curve (PPC)(PPC)
The slope of the curve indicates the The slope of the curve indicates the amount of one good that must be amount of one good that must be given up to produce more of the given up to produce more of the other good.other good.
Slope = rise / runSlope = rise / run
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Production Possibilities Curve Production Possibilities Curve (PPC)(PPC)
A A PPCPPC is bowed outward because of is bowed outward because of the concept of increasing opportunity the concept of increasing opportunity costs costs
ex. exerciseex. exercise
ex. cleaning your roomex. cleaning your room
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Production Possibilities Curve Production Possibilities Curve (PPC)(PPC)
ex. Partying vs. Studyingex. Partying vs. Studying
1. Efficient points1. Efficient points2. Inefficient points2. Inefficient points3. Unattainable points3. Unattainable points4. How much is produced at a certain 4. How much is produced at a certain
pointpoint5. What is given up when moving from 5. What is given up when moving from
one point to anotherone point to another
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Production Possibilities Curve Production Possibilities Curve (PPC)(PPC)
Practice:Practice: Can you identify the points? Can you identify the points? How much is being produced at point How much is being produced at point
C?C? Describe what happens when you Describe what happens when you
move from point C to point E.move from point C to point E.
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4 factors that shift the PPC curve4 factors that shift the PPC curve
1. A change in the economy’s resource 1. A change in the economy’s resource basebase
InvestmentInvestment: the purchase, construction, : the purchase, construction, or development of resourcesor development of resources
However, investment requires us to However, investment requires us to give up consumption goodsgive up consumption goodsex. Consider the two PPCs (pg. 41)ex. Consider the two PPCs (pg. 41)
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Investment: Shifting out the PPCInvestment: Shifting out the PPC
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4 factors that shift the PPC curve4 factors that shift the PPC curve
2. Changes in technology2. Changes in technology
technologytechnology: the knowledge available : the knowledge available in an economy at any given time. in an economy at any given time.
Technology determines the amount of Technology determines the amount of output we can generate with our output we can generate with our limited resources.limited resources.
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4 factors that shift the PPC curve4 factors that shift the PPC curve
3. A change in the rules under which 3. A change in the rules under which the economy functionsthe economy functions
ex. Development of a system of ex. Development of a system of patentspatents
ex. The Jim Crow lawsex. The Jim Crow laws
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4 factors that shift the PPC curve4 factors that shift the PPC curve
4. Changes in work habits4. Changes in work habits
ex. working harder can shift curve ex. working harder can shift curve outwardoutward
ex. working less can shift curve inwardex. working less can shift curve inward
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Law of Comparative AdvantageLaw of Comparative Advantage
The total output of a group of The total output of a group of individuals, an entire economy, or a individuals, an entire economy, or a group of nations will be greatest when group of nations will be greatest when the output of each good is produced the output of each good is produced by whoever has the lowest by whoever has the lowest opportunity cost.opportunity cost.
ex. Should LeBron James clean his ex. Should LeBron James clean his own own house? house?
ex. Who should mow the lawnex. Who should mow the lawn
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Economic organizationEconomic organization
Every economy faces 3 questions:Every economy faces 3 questions:
1. What will be produced?1. What will be produced?
2. How will it be produced?2. How will it be produced?
3. For whom will it be produced?3. For whom will it be produced?
ex. Remember the candy gameex. Remember the candy game
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Economic organizationEconomic organization
SocialismSocialism: a system of economic : a system of economic organization where:organization where:
1.1. Ownership and control of the means of Ownership and control of the means of production rest with the stateproduction rest with the state
2.2. Resource allocation is determined by Resource allocation is determined by centralized planningcentralized planning
Collective decision makingCollective decision making: the method : the method of organization that relies on public of organization that relies on public sector decision making to resolve basic sector decision making to resolve basic economic questions.economic questions.
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Economic organizationEconomic organization
CapitalismCapitalism: A system of economic : A system of economic organization where: organization where:
1.1. Productive resources are owned privatelyProductive resources are owned privately2.2. Goods and resources are allocated Goods and resources are allocated
through market pricesthrough market prices
Market organizationMarket organization: a method of : a method of organization in which private parties organization in which private parties make their own plans and decisions with make their own plans and decisions with the guidance of market pricesthe guidance of market prices
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Economic organizationEconomic organization
Why capitalism tends to work (and Why capitalism tends to work (and socialism does not):socialism does not):
1. Capitalism is similar to natural 1. Capitalism is similar to natural selection. It uses the idea of market selection. It uses the idea of market efficiencyefficiency
2. Socialism suffers from an information 2. Socialism suffers from an information problem.problem.
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ReviewReview
1. Understand the concept of 1. Understand the concept of opportunity costopportunity cost
2. Know how trade creates value and 2. Know how trade creates value and leads to economic progress.leads to economic progress.
3. What are the 4 incentives of 3. What are the 4 incentives of property rightsproperty rights
4. Be able to read a PPC graph and 4. Be able to read a PPC graph and identify the points.identify the points.
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ReviewReview
5. What are the four factors that shift 5. What are the four factors that shift the PPC curvethe PPC curve
6. What is the law of comparative 6. What is the law of comparative advantageadvantage
7. What are the three questions every 7. What are the three questions every economy faceseconomy faces
8. Know the difference between 8. Know the difference between capitalism and socialism and why capitalism and socialism and why capitalism workscapitalism works