Appendix A. What s in Economics for You?

Transcription

1 Appendix A What s in Economics for You?

2 LEARNING OBJECTIVES A.1 Explain scarcity and describe why you must make smart choices among your wants A.2 Define and describe opportunity cost A.3 Describe how comparative advantage, specialization, and trade make us all better off A.4 Explain how markets connect us all using the circular flow of economic life A.5 Illustrate and explain the Three Steps to Smart Choices

3 ARE YOU GETTING ENOUGH? SCARCITY AND CHOICE Because you can never satisfy all of your wants, making the most out of your life requires smart choices about what to go after, and what to give up.

4 SCARCITY AND CHOICE Problem of scarcity arises because of limited money, time, and energy Resources can produce only a fraction of the goods and services desired by people Scarcity implies the need for choice. Every choice has an associated cost -- opportunity cost Opportunity cost is defined as the benefit given up by not using resources in the best alternative way.

5 Quantity of Bubble Gum Consider the choice that must be made by a child who has only 50 cents to spend Unattainable A She wishes to spend it all on two types of candy. 6 4 Bubble gums cost 5 cents each and lollipops cost 10 cents each. Attainable Quantity of Lollipops Combination A is unattainable.

6 Quantity of Bubble Gum Unattainable A Combination B is attainable. The negatively sloped line provides a boundary between attainable and unattainable combinations. 4 B Attainable Quantity of Lollipops The opportunity cost of getting 1 more lollipop is the 2 bubble gums that must be given up.

7 Quantity of Civilian Goods The Production Possibility Boundary The PPB illustrates: Unattainable combinations scarcity d choice opportunity cost a c Attainable combinations PPB b Point d shows scarcity; it is unattainable with current resources. Points a and b show choice. They are both attainable, but which one will be chosen? Quantity of Military Goods The negative slope illustrates opportunity cost.

8 GIVE IT UP FOR OPPORTUNITY COST Opportunity cost is the single most important concept both in economics and for making smart choices in life.

9 OPPORTUNITY COST Every choice involves a trade-off, you have to give up something to get something else True cost of any choice is the opportunity cost, cost of best alternative given up For a smart choice, value of what you get must be greater than value of what you give up

10 GAINS FROM TRADE Opportunity cost and comparative advantage are key to understanding why specializing and trading make us all better off.

11 GAINS FROM TRADE With voluntary trade, each person feels what they get is better than what they give up Absolute advantage ability to produce at lower absolute cost Comparative advantage ability to produce at lower opportunity cost

12 Opportunity cost = Comparative advantage key to mutually beneficial gains from trade Give Up Get Trade makes individuals better off when each specializes in producing product/service with comparative advantage (lower opportunity cost) trades for the other product/service

13 Fig. A.1 Jacqueline's Production Possibilities Bread (loaves) Wood (cords)

14 Fig. A.2 Samantha s Production Possibilities Bread (loaves) Wood (cords)

15 Fig. A.3 Opportunity Cost for Jacqueline & Samantha Opportunity Cost of 1 Additional Loaf of Bread Cord of Wood Jacqueline Gives up 2 cords wood Gives up 1/2 loaf bread Samantha Gives up 1/2 cord wood Gives up 2 loaves bread Comparative Advantage Samantha lower opportunity cost bread-making Jacqueline lower opportunity cost wood-chopping

16 Even if one individual has absolute advantage in producing everything, differences in comparative advantage allow mutually beneficial gains from specializing and trading

17 CHOOSING YOUR WAY THE CIRCULAR FLOW OF ECONOMIC LIFE The circular-flow diagram of economic life is a map showing how markets connect us all. It illustrates how smart choices by households, businesses, and governments interact in markets.

18 continued THE CIRCULAR FLOW OF ECONOMIC LIFE All the complexity of the Canadian economy can be reduced to three sets of players households, businesses, and governments o in input markets households are sellers and businesses are buyers o in output markets households are buyers and businesses are sellers o governments set rules of the game and can choose to interact in any aspect of economy

19 Microeconomics analyzes individual choices in households, businesses and governments Macroeconomics analyzes performance of the whole Canadian economy and global economy

20 WEIGH MARGINAL BENEFITS & COSTS Three Keys to Smart Choices 1 Choose only when additional benefits are greater than additional opportunity costs 2 Count only additional benefits and additional opportunity costs 3 Be sure to count all additional benefits and costs, including implicit costs and externalities

21 Marginal benefits additional benefits from next choice Marginal opportunity costs additional opportunity costs from next choice Implicit costs opportunity costs of investing your money or time Negative (or positive) externalities costs (or benefits) that affect others external to a choice or a trade

22 ECON100: Chapter 1A January 14, 2013 The problem of scarcity a) exists because all human wants cannot be satisfied with limited time, money and energy b) would disappear if we did not have to make choices c) can be solved in a market economy d) exists because the limited human expectations cannot be satisfied with available knowledge

23 Which of the following is one of the three steps to smart choices? a) The choice is smart when benefits are greater than additional opportunity costs b) The choice is smart when total benefits are greater than total costs c) The choice is smart when measurable benefits are greater than measurable costs d) Be sure to count all benefits and costs, excluding implicit costs or externalities

24 The main implication of scarcity in economics is that people must a) be unhappy b) make choices c) be selfish d) not be selfish

25 The circular flow diagram of economic life shows a) output markets where businesses are buyers and households are sellers b) input markets in which households are sellers and businesses are buyers c) input markets in which businesses are sellers and households are buyers d) input and output markets in which the government determines sellers and buyers

26 Microeconomics a) is scientific in its approach, while macroeconomics is not b) analyzes the consequences of small changes in economic choices; macroeconomics analyzes the consequences of large changes in economic choices. c) analyzes the choices of individual economic units; macroeconomics analyzes the performance of overall economy d) analyzes the performance of overall economy; macroeconomics analyzes choices of individual economic units