15 FUNDAMENTAL 15 FUNDAMENTAL CONCEPTSCONCEPTS

BEGINNING WITH THE END IN MIND

SCARCITYSCARCITY

SCARCITY OF RESOURCESLAND

SCARCITYSCARCITY

LABOR

SCARCITYSCARCITY

CAPITAL

SCARCITYSCARCITY

THE ECONOMIC PROBLEMLIMITED RESOURCES VS. UNLIMITED

WANTS AND NEEDSSCARCITY NECESSITATES CHOICE

OR

TRADEOFFS/OPPORTUNITY TRADEOFFS/OPPORTUNITY COSTSCOSTS

ALL CHOICES INVOLVE TRADEOFFS– YOU MUST CHOOSE A OR B

“THERE IS NO SUCH THING AS A FREE LUNCH”

SLEEP OR SCHOOL? WORK OR FRIENDS?

A DOLLAR SPENT ON VACTION IS A DOLLAR NOT SPENT ON RETIREMENT

OR

TRADEOFFS/OPPORTUNITY TRADEOFFS/OPPORTUNITY COSTS COSTS

GUNS VS. BUTTER

CLEAN ENVIRONMENT VS. HIGHER INCOMES

OR

OR

TRADEOFFS/OPPORTUNITY TRADEOFFS/OPPORTUNITY COSTSCOSTS

EFFICIENCY VS. EQUITYGETTING THE MOST OUT OF

SCARCE RESOURCES VS. FAIRNESS OF DISTRIBUTION

TRADEOFFS/OPPORTUNITY TRADEOFFS/OPPORTUNITY COSTSCOSTS

REDISTRIBUTION OF INCOME THROUGH UNEMPLOYMENT AND WELFARE REDUCES INCENTIVE TO WORK HARD

MORE EQUAL SLICES BUT SMALLER PIE

TRADEOFFS/OPPORTUNITY TRADEOFFS/OPPORTUNITY COSTS COSTS

ALL TRADEOFFS INVOLVE OPPORTUNITY COSTS– THE COST OF THE NEXT BEST

ALTERNATIVE USE OF TIME, MONEY OR RESOURCES

SLEEPING IN SATURDAY MORNING COSTS $35?!?!?!?!?

TRADEOFFS/OPPORTUNITY TRADEOFFS/OPPORTUNITY COSTSCOSTS

EXPLICIT + IMPLICIT COSTS TRUE COST OF COLLEGE??

– EXPLICIT=TUITION AND BOOKS– IMPLICIT=LOST WAGES ($10/HOUR =

~$20,000/YEAR

SHOULD TOP ATHLETES STAY IN COLLEGE?

RATIONAL PEOPLE THINK RATIONAL PEOPLE THINK AT THE MARGINAT THE MARGIN

MUST WEIGH ADDITIONAL COSTS WITH ADDITIONAL BENEFIT

MARGINAL COST IS THE ADDITIONAL COST OF AN ADDITIONAL UNIT

MARGINAL BENEFIT IS THE ADDITIONAL BENEFIT FROM AN ADDITIONAL UNIT

RATIONAL PEOPLE THINK RATIONAL PEOPLE THINK AT THE MARGINAT THE MARGIN

NEVER LET YOUR MARGINAL COSTS EXCEED YOUR MARGINAL BENEFITS

MC=MR PROFIT MAXIMIZATIONSHOULD THE AIRLINE SELL THE $500

TICKET FOR $100 TEN MINUTES BEFORE TAKEOFF???

PEOPLE RESPOND TO PEOPLE RESPOND TO INCENTIVESINCENTIVES

DECISIONS MADE TO GAIN BENEFIT OR PROFIT AND TO AVOID LOSS OR PAIN

KNOWING PEOPLE RESPOND PREDICTALBLY TO INCENTIVES SHOULD BE KEPT IN MIND WHEN SETTING PUBLIC POLICY

PEOPLE RESPOND TO PEOPLE RESPOND TO INCENTIVESINCENTIVES

SUV TAX BREAKTAXES, UNEMPLOYMENT BENEFITSSOCIAL SECURITYLATE SLIPS

RELATIVE SCARCITYRELATIVE SCARCITY

DEMAND FOR A GOOD OR SERVICE IN RELATION TO THE SUPPLY OF THAT GOOD

1000 < 10BALLPLAYERS VS. TEACHERSRELATIVELY SCARCE GOODS = $$$$$

VOLUNTARY EXCHANGEVOLUNTARY EXCHANGE

BOTH PARTIES EXPECT TO BE BETTER OFF AFTER THE EXCHANGE

WIN/WIN SITUATIONCOMPETITION BETWEEN

BUYERS/SELLERSNET GAIN IS POSITIVE FOR BOTH

PARTIES

SPECIALIZATION LEADS TO SPECIALIZATION LEADS TO INTERDEPENDENCEINTERDEPENDENCE

SPECIALIZATION: CONCENTRATION OF PRODUCTIVE EFFORTS…LEADS TO GREATER EFFICIENCY

BASED ON COMPARATIVE ADVANTAGE…WHO HAS THE LOWEST OPPORTUNITY COST?

FORCES RELIANCE ON OTHERS TO LIVE

PRICE=SUPPLY + DEMANDPRICE=SUPPLY + DEMAND

SUPPLY PRICE SUPPLY PRICE

DEMAND PRICEDEMAND PRICE

PRICE=SUPPLY + DEMANDPRICE=SUPPLY + DEMAND

SUPPLY DEMAND PRICE

SUPPLY DEMAND PRICE

DEMAND SUPPLY PRICE

DEMAND SUPPLY PRICE

PRICE=SUPPLY + DEMANDPRICE=SUPPLY + DEMAND

HIGH DEMAND AND LOW SUPPLY=HIGH PRICES

PRICE=SUPPLY + DEMANDPRICE=SUPPLY + DEMAND

MARKET SYSTEM DEPENDS ON PRICES AND SELF-INTEREST TO GUIDE RESOURCES

PRICES=SUPPLY+DEMANDPRICES=SUPPLY+DEMAND

HOUSEHOLDS (DEMAND) AND FIRMS (SUPPLY) INTERACT

ADAM SMITH…INVISIBLE HAND, LAISSEZ FAIRE

ADAM SMITHADAM SMITH

“…IT IS NOT THE BENEVOLENCE OF THE BUTCHER, THE BREWER, OR THE BAKER THAT WE EXPECT OUR DINNER, BUT FROM THEIR REGARD TO THEIR OWN INTEREST…”

PRICE = SUPPLY+ DEMANDPRICE = SUPPLY+ DEMAND

COMMAND ECONOMY…DECISIONS MADE BY GOVERNMENT

CENTRALLY PLANNED – WHAT IS PRODUCED?– HOW MUCH IS PRODUCED?– FOR WHOM? WHO SHOULD PRODUCE?

PRICE = SUPPLY+ DEMANDPRICE = SUPPLY+ DEMAND

COMMAND ECONOMIES– DO NOT MAXIMIZE SOCIAL WELFARE IF

RESOURCES ARE NOT GUIDED EFFICIENTLY

COMMAND ECONOMIES MAY PROVIDE FOR RAPID SHIFTS IN ECONOMIC ACTIVITY BUT PERFORM POORLY IN THE LONG RUN

COMPETITION DRIVES COMPETITION DRIVES EFFICIENCYEFFICIENCY

EFFICIENCY– ALLOCATIVE OR ECONOMIC

GETTING WHAT THE ECONOMY WANTS

– TECHNICAL PRODUCING THE MOST WITH THE FEWEST

AMOUNT OF RESOURCES

COMPETITION INCREASES BOTH LEVELS OF EFFICIENCY

COMPETITION DRIVES COMPETITION DRIVES EFFICIENCYEFFICIENCY

SPORTSACADEMICS??? DRIVE BEHIND

VOUCHERSWALMART VS KMARTMUSIC INDUSTRYINTERNET ACCESS AND SERVICES

PUBLIC GOODS AND PUBLIC GOODS AND MARKET FAILURESMARKET FAILURES

PRIVATE GOODS– EXCLUDABLE– RIVAL

CLOTHING, FOOD, DVD PLAYERS…

PUBLIC GOODS– NON-EXCLUDABLE– NON-RIVAL

DEFENSE, ROADS, PUBLIC PARKS

Types of GoodsTypes of Goods

Rival?

Yes No

Yes

Private Goods Ice-cream cones Clothing Congested toll roads

Natural Monopolies Fire protection Cable TV Uncongested toll roads

No

Common Resources Fish in the ocean The environment Congested nontoll roads

Public Goods National defense Knowledge Uncongested nontoll roads

Excludable?

PUBLIC GOODS AND PUBLIC GOODS AND MARKET FAILURESMARKET FAILURES

PRIVATE MARKETS HAVE NO INCENTIVE TO PROVIDE FOR PUBLIC GOODS…THIS NECESSITATES GOVERNMENT INVOLVEMENT

COMMON POOL RESOURCES– NON-EXCLUDABLE– RIVAL (DEPLETABLE)

PUBLIC GOODS AND PUBLIC GOODS AND MARKET FAILURESMARKET FAILURES

EXTERNALITIES…ECONOMIC SIDE EFFECT THE IMPOSES COSTS OR BENEFITS ON SOMEONE OTHER THAN THE PRODUCER AND THE CONSUMER

EXTERNALITIESEXTERNALITIES

NEGATIVE…POLUTION

POSITIVE…RESEARCH, EDUCATION

PUBLIC GOODS AND PUBLIC GOODS AND MARKET FAILURESMARKET FAILURES

MARKET POWER…THE ABILITY TO UNDULY INFLUENCE MARKET PRICES

LITTLE OR NO COMPETITION…MONOPOLIES

MARKET AWARDS THOSE ACCORDING TO ABILITY TO PRODUCE

PRODUCTIVITY/STANDARD PRODUCTIVITY/STANDARD OF LIVINGOF LIVING

STANDARD OF LIVING: QUALTIY OF LIFE MEASURED BY MATERIAL POSSESIONS

PRODUCTIVITY: AMOUNT OF GOODS AND SERVICES PRODUCED PER HOUR

DIRECT RELATIONSHIP

PRODUCTIVITY/STANDARD PRODUCTIVITY/STANDARD OF LIVINGOF LIVING

UNITED STATES $29,000

MEXICO $8,000

NIGERIA $900

STANDARD OF LIVING AND STANDARD OF LIVING AND PRODUCTIVITYPRODUCTIVITY

PRODUCTIVITY/STANDARD PRODUCTIVITY/STANDARD OF LIVINGOF LIVING

REMEMBER THE RULE OF 72!!!ALL ABOUT PRODUCTIVITY

– INVESTMENT NEEDED CAPTIAL TECHNOLOGY EDUCATION

HISTORICAL, PERSONAL OR NATIONAL COMPARISONS

PRODUCTIVITY/STANDARD PRODUCTIVITY/STANDARD OF LIVINGOF LIVING

IMPACT OF GOVERNMENT DEFICIT– DEFICIT: AMOUNT BY WHICH

EXPENDITURES EXCEED REVENUE (YEAR TO YEAR)

– DEBT: CUMULATIVE EFFECT OF PAST DEFICITS (OVER TIME)

DEBATE OVER IMPACT

PRODUCTIVITY/STANDARD PRODUCTIVITY/STANDARD OF LIVINGOF LIVING

GOVERNMENT DEFICITS LEAD TO CROWDING OUT

HIGHER INTEREST RATES FOR ALL

LESS INVESTMENT IN HUMAN AND PHYSICAL CAPITAL

CUTTING TAXES WILL SPUR MORE GROWTH…MORE INCENTIVES

MORE GROWTH MEANS MORE REVENUE

GROW OUT OF THE DEFICIT

PRODUCTIVITY/STANDARD PRODUCTIVITY/STANDARD OF LIVINGOF LIVING

IF DEFICITS DO “CROWD OUT”– LOWER INVESTMENT TODAY MEANS

LOWER PRODUCTIVITY TOMORROW

DO DEFICITS LEAD TO LOWER STANDARDS OF LIVING IN THE LONG RUN???

UNEMPLOYMENT VS UNEMPLOYMENT VS INFLATIONINFLATION

TWO MAJOR PROBLEMS IN MACROECONOMY

TRADEOFF IN THE SHORT RUNPHILLIPS CURVE

U

I

UNEMPLOYMENT VS UNEMPLOYMENT VS INFLATIONINFLATION

PUBLIC POLICY– FISCAL POLICY

TAX AND/OR SPEND– MONETARY POLICY

CONTROL OF MONEY SUPPLY

LENDERS HURT BY LENDERS HURT BY INFLATIONINFLATION

INFLATION…GENERAL RISE IN PRICE LEVELS

VALUE OF DOLLAR DECREASESIF UNEXPECTED WITH A FIXED

INTEREST RATE THEN LENDERS GET PAID BACK IN CHEAPER DOLLARS

INTEREST RATES GUIDE INTEREST RATES GUIDE THE ECONOMYTHE ECONOMY

INTEREST RATES…PRICE OF BORROWING MONEY

SAVINGS RATE VS BORROWING RATE

FEDERAL RESERVE BOARD CONTROLS MONEY SUPPLY

INTEREST RATES GUIDE INTEREST RATES GUIDE ECONOMYECONOMY

MORE MONEY LOWER RATES MORE

BORROWING MORE SPENDING ECONOMY HEATS

UP

LESS MONEY HIGHER RATES LESS BORROWING LESS SPENDING ECONOMY SLOWS

DOWN

INVESTMENT IS NEEDED INVESTMENT IS NEEDED FOR GROWTHFOR GROWTH

NO PAIN NO GAININVESTMENT OF TIME MONEY OR

RESOURCES NEEDED FOR GROWTHCAPITAL GOODSTECHNOLOGYHUMAN CAPITAL/EDUCATION

INVESTMENT IS NEEDED INVESTMENT IS NEEDED FOR GROWTHFOR GROWTH

RULE OF 72AMOUNT OF TIME IT TAKES FOR

“INVESTMENT” TO DOUBLE72/7=10 YEARS TO DOUBLE72/2=36 YEARS TO DOUBLE