economics 211 principles of microeconomics dr. greg delemeester summer 2011
TRANSCRIPT
Economics 211Principles of
Microeconomics
Dr. Greg DelemeesterSummer 2011
EconomicsMaking choices under conditions of scarcity
What stocks should I buy for my portfolio? How many Whoppers should I eat? How many hours should I study for biology? How many cars should I steal?
Making choices under conditions of scarcity What stocks should I buy for my portfolio? How many Whoppers should I eat? How many hours should I study for biology? How many cars should I steal?
What Do Schoolteachers and Sumo Wrestlers Have in Common?
How Is the Ku Klux Klan Like a Group of Real-Estate Agents?
Why Do Drug Dealers Still Live with Their Moms?
Where Have All the Criminals Gone?
What Makes a Perfect Parent? Would a Roshanda by Any
Other Name Smell as Sweet?
Increasing Residual Wage Inequality: Composition Effects, Noisy Data, or Rising Demand for Skill?
Medium-Term Business Cycles Can Information Heterogeneity
Explain the Exchange Rate Determination Puzzle?
Macroeconomic Effects of Tax Changes
An Efficient Dynamic Auction for Heterogeneous Commodities
Asymmetric Contests with Conditional Investments
“Billy, you’ve been a fine son, but it’s time for a change.I found a child overseas who can do it cheaper.”
Economic Fundamentals Self Interest
Rationality Purposeful behavior Incentives matter
Best Undergrad College Degrees by Salary
Major Starting Median Salary Mid-Career Median Salary
Petroleum Engineering $93,000 $157,000
Physics $50,700 $99,600
Economics $48,800 $97,800
Finance $47,500 $91,500
MIS $50,900 $90,300
Math $46,400 $88,300
Chemistry $42,400 $83,700
Political Science $40,100 $81,700
Accounting $44,500 $77,500
Marketing $38,600 $77,300
History $38,500 $73,000
Management $41,100 $70,600
English $37,800 $67,500
Journalism $35,800 $66,600
Psychology $35,300 $62,500
Graphic Design $35,400 $56,800
Source: www.payscale.com
Economic Fundamentals
Self Interest Rationality Purposeful behavior Incentives matter
TANSTAAFL Scarcity Choices Opportunity costs
ThereAin’tNoSuchThingAsAFreeLunch
ThereAin’tNoSuchThingAsAFreeLunch
Trade-offs!
Soak Up the Sun (2002)
William installs custom sound systems in cars. If he installs 7 per day, his total costs are $300. If he installs 8 per day, his total costs are $400. William will install only 8 sound systems per day if the 8th customer is willing to pay at least:
a) b) c) d)
0% 0% 0% 0%
a) $50b) $100c) $300d) $400
a) $50b) $100c) $300d) $400
Space Mountain(Problem Set 1, #9)
You have waited 30 minutes in a line for the Space Mountain ride at Disneyworld. You see a sign that says, "From this point on your wait is 45 minutes." You must decide whether to continue in line or to move elsewhere.
On what basis do you make the decision?Do the 30 minutes you've already stood in line come into play?
Marginal Analysis ignores sunk costs!
Economic FundamentalsUnintended Consequences
CAFE (fuel economy) standards27.5 MPG fleet averageObjective: Save energy + clean environment
Lighter + smaller cars = more dangerous cars ? National Academy of Sciences: 1300 to 2600 extra
highway deaths each year
Modes of Analysis Positive Analysis Normative Analysis
Economic Model of Crime
Decision Rule If MB > MC steal another car
Assumptions Resale value on car = $40,000 Income = $20,000 Jail term = 5 years Probability of Arrest = 20% Probability of Conviction = 90%
MB = $40,000
MC = (5)($20,000)(.20)(.90) = $18,000
Steal the car!
Policy Implications [How to deter crime?] Increase jail sentence Increase probability of arrest Increase probability of conviction Increase income
Economic Model of Crime
Which of the following will cause property crime to increase?
0% 0% 0% 0%
a) An increase in jail terms.b) A decrease in personal
incomes.c) An increase in the probability
of arrest.d) A decrease in the expected
benefit.
a) An increase in jail terms.b) A decrease in personal
incomes.c) An increase in the probability
of arrest.d) A decrease in the expected
benefit.
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
0.0 0.5 1.0 1.5 2.0 2.5 3.0
Guns Sold (Millions)
Gu
n-R
elat
ed M
urd
ers
(Th
ou
san
ds)
1965
1970
1975
1980
[What’s the Headline?]
Correlation is not causation.
Applications(#3, Problem Set 1) A few years ago, Tina ranked three
available options as follows: 1st Choice: pay $21,000 tuition and finish a
Master's degree in fine arts at the Ohio State University.
2nd Choice: earn $19,000 working part-time managing a small local theater and spend her spare time pursuing her theater hobby as a volunteer director of small-theater plays.
3rd Choice: earn $44,000 working full-time reviewing yellow page advertisements for Verizon.
a) $19,000b) $21,000c) $65,000d) $84,000
What is the minimum value of Tina’s opportunity cost for pursuing her first choice?
19000 21000 65000 84000
0% 0% 0% 0%
1st Choice: pay $21,000 tuition and finish a Master's degree in fine arts at the Ohio State University.2nd Choice: earn $19,000 working part-time managing a small local theater and spend her spare time pursuing her theater hobby as a volunteer director of small-theater plays.3rd Choice: earn $44,000 working full-time reviewing yellow page advertisements for Verizon.
(#4, Problem Set 1)The acres of grass surrounding the Taj Mahal in Agra, India, are often cut by young women who slice off handfuls with short kitchen blades. Is this a low- or high-cost way to keep a lawn mowed?
Maximizing the Net Benefits from Pizza
Q
TBMB
Q
TCMC
How many pizzas should Stephanie purchase?
One
Two
Thre
e F
our F
ive
Six
0% 0% 0% 0% 0% 0%
a) Oneb) Twoc) Threed) Foure) Fivef) Six
a) Oneb) Twoc) Threed) Foure) Fivef) Six
Rational Behavior:Continue an activity until
MB = MC
0 1 2 3 4 5 6 7$0
$2
$4
$6
$8
$10
$12
$14
Marginal Benefit and Marginal Cost
Dollars
Piz
za
MC
MB
0 1 2 3 4 5 6 705
101520253035404550
Total Benefit and Total Cost
Pizza
Do
lla
rs
TB
TC
Production Possibilities Frontier Shows tradeoffs facing an economy that
produces two goods Assumptions
Resources are fixedLandLaborHuman CapitalCapital
Technology is fixed
Beer
Cars
A
B
CD
E
Unattainable
Inefficient
Assume a concave production possibility frontier. Suppose that the society decides to increase the production of beer by 20,000 kegs, and that as a result the output of cars falls by 1000. If a further increase of 20,000 kegs of beer is sought, we can expect that the output of cars will:
0% 0% 0% 0%
a) fall by 1000. b) fall by less than 1000. c) fall by more than 1000.d) increase by less than 1000.
a) fall by 1000. b) fall by less than 1000. c) fall by more than 1000.d) increase by less than 1000.
Beer
Cars
A
B
C
D
Δ Beer
- Δ Cars
Slope of PPF = - Δ Cars / Δ Beer
Concave PPF implies “law of increasing opportunity cost”
(measures the Opportunity Cost)
Shifts in the PPF are due to: Change in resources Change in technology
Shifts in the PPF are due to: Change in resources Change in technology
PPF and Economic GrowthEconomic Growth requires an expanding PPF
Examples Cars v. Beer: more efficient brewing process Houses v. Computers: immigration Coffee v. Clothing: Haiti earthquake Food v. Electronics: China’s Cultural Revolution
Production Possibilities Frontier
Consider the PPF depicted below. A reduction in the amount of unemployment could be described as the movement from:
0 2 4 6 8 10 120
20
40
60
80
100
120
Books
Mu
sic
CD
s
A
B
CD
E
A to
B
B to
D
D to
C
B to
E
0% 0% 0% 0%
a) A to Bb) B to Dc) D to Cd) B to E
a) A to Bb) B to Dc) D to Cd) B to E
All societies must answer basic questions: What will be produced? How will it be produced? For whom will it be produced?
Allocation Mechanisms Tradition Plan Market
Choices, choices, choices…
Gains From Trade
Trade implies mutually beneficial exchanges Not a zero-sum game!
Comparative Advantage David Ricardo Lowest opportunity cost producer Specialization and trade can allow individuals (and
countries) to expand their consumption beyond their PPF constraints
Trade implies mutually beneficial exchanges Not a zero-sum game!
Comparative Advantage David Ricardo Lowest opportunity cost producer Specialization and trade can allow individuals (and
countries) to expand their consumption beyond their PPF constraints
Pizza Pizza
Cars Cars100
400
50
600
50 25
200
300
∆C = 50
∆C = 25
∆P = -200
∆P = -300
Country A Country B
Opportunity cost of 1 Car is 4 Pizzas Opportunity cost of 1 Car is 12 Pizzas
slope = ∆P/ ∆ C = -200/50 = - 4/1
slope = ∆P/ ∆ C = -300/25 = - 12/1
Country A has the comparative advantage in producing cars.
Pizza
Cars100
400
50
200
Country A
Pizza
Cars50
600
25
300
Country B
No Trade With Trade
Pizza Cars Pizza Cars
A
B
World
200
0600
0 100
500 75
25300
50
100600
Production
Problem Set 1: #14
Go to college
Tuition $27,000
Food + Rent $ 8,000
Parties $ 4,000
Books $ 900
Car $ 4,600
Don’t go to college
Job $24,000
Food + Rent $ 8,000
Parties $ 4,000
Car $ 4,600
Opportunity cost of going to college = $27,000 + $900 + $24,000 = $51,900
Sue Student
Problem Set 1: #13
Output per hour Opportunity cost of …
Country Tons of Steel
Bushels of Wheat
1 ton of steel
1 bushel of wheat
US 6 60
South Korea 3 6
US South Korea
Steel Wheat Steel Wheat
Production change -6 +60
Trade +10 -50
Consumption change
10 W
2 W
1/10 S
1/2 S
+12 -24
-10 +50
+4 +10 +2 +26
US switches 1 hour of labor from steel to wheat
SK switches 4 hours of labor from wheat to steel
Trade: 50 W for 10 S
Problem Set 1: #21
Assume that Robinson and Crusoe live on a desert island. With a day’s labor, Robinson can produce 6 fish or 4 coconuts; Crusoe can produce 3 fish or 1 coconut. Robinson’s opportunity cost of producing 1 coconut is ____, and he should specialize in the production of ____.
a) b) c) d)
0% 0% 0% 0%
a) 1/4 fish; coconutsb) 1.5 fish; coconutsc) 3 fish; fishd) 6 fish; coconuts
a) 1/4 fish; coconutsb) 1.5 fish; coconutsc) 3 fish; fishd) 6 fish; coconuts
Corner offices in high-rise office buildings usually cost more to rent than other offices. This best illustrates the economic principle of:
a) b) c) d)
0% 0% 0% 0%
a) Scarce resourcesb) Marginal analysisc) Equilibrium d) Opportunity costs
a) Scarce resourcesb) Marginal analysisc) Equilibrium d) Opportunity costs
a) Zero—the ticket is free.b) $15c) $55d) $40
a) Zero—the ticket is free.b) $15c) $55d) $40
A friend comes up to you and offers to give you a free ticket to the local professional team's baseball game that night. You decide to attend the game. It takes five hours to go to the game and costs you $15 for transportation. If you had not attended the game, you would have worked at your part-time job for $8 an hour. What is the cost of you attending the game?
a) b) c) d)
0% 0% 0% 0%
a) 10 million cups of teab) 5 million sconesc) 10 million sconesd) The answer is impossible to determine
from the information given.
a) 10 million cups of teab) 5 million sconesc) 10 million sconesd) The answer is impossible to determine
from the information given.
In the accompanying figure, Tealand is currently producing at point C on its production possibilities frontier. What is the opportunity cost in Tealand of increasing the production of tea from 20 million cups to 30 million cups?
a) b) c) d)
0% 0% 0% 0%
a) International trade will increase the average income of Americans.
b) Higher expenditures on health care will reduce infant mortality rates.
c) We ought to reduce our dependence on oil imports in order to increase our national security.
d) Increased defense spending will lead to higher budget deficits.
a) International trade will increase the average income of Americans.
b) Higher expenditures on health care will reduce infant mortality rates.
c) We ought to reduce our dependence on oil imports in order to increase our national security.
d) Increased defense spending will lead to higher budget deficits.
Which of the following is a normative statement?
a) b) c) d)
0% 0% 0% 0%
a) you will be better off if you eat one more slice.
b) the total cost of eating the pizza will be more than the total benefit of eating the pizza.
c) you will be worse off if you eat one more slice.
d) you will be no better off and no worse off from eating one more slice.
a) you will be better off if you eat one more slice.
b) the total cost of eating the pizza will be more than the total benefit of eating the pizza.
c) you will be worse off if you eat one more slice.
d) you will be no better off and no worse off from eating one more slice.
While eating pizza, you discover that the marginal benefit of eating one more slice is greater than the marginal cost of that slice. You then conclude:
a) b) c) d)
0% 0% 0% 0%
Which of the graphs below shows the impact of scientists developing a more powerful fertilizer?
Fig
ure A
Fig
ure B
Fig
ure C
Fig
ure D
0% 0% 0% 0%
a) Figure Ab) Figure Bc) Figure Cd) Figure D
a) Figure Ab) Figure Bc) Figure Cd) Figure D
If they spend all night writing computer programs, Derek can write 10 programs while Tian can write 5. If they spend all night making sunglasses, Derek can make 6 while Tian can make 4. From this information we know that:
a) b) c) d)
0% 0% 0% 0%
a) Tian’s opportunity cost of writing programs is less than that of Derek.
b) Derek’s opportunity cost of writing programs and of making sunglasses is less than that of Tian.
c) Tian’s opportunity cost of writing programs and of making sunglasses is less than that of Derek.
d) Derek’s opportunity cost of writing programs is less than that of Tian.
a) Tian’s opportunity cost of writing programs is less than that of Derek.
b) Derek’s opportunity cost of writing programs and of making sunglasses is less than that of Tian.
c) Tian’s opportunity cost of writing programs and of making sunglasses is less than that of Derek.
d) Derek’s opportunity cost of writing programs is less than that of Tian.
“I’d like to introduce you to Marty Thorndecker. He’s an economist but he’s really very nice.”
Greg Delemeester