Micro Chapter 2
Some Tools of the Economist
6 Learning Goals
1) Define and recognize examples of opportunity
costs (repeat of Chapter 1)
2) Discern why voluntary trade creates value
3) Realize why property rights are key to
economic progress
4) Illustrate the concepts of tradeoffs, opportunity
costs, and growth
5) Recognize that specialization and division of
labor lead to higher output levels and living
standards
6) List society’s three questions and specify the
kinds of economic organizations
Trade Creates Value
Two opposing views of trade:
1. When people trade, one person gains
and the other person loses
Referred to as a zero-sum game
Watch video: Wall Street- zero sum game
Two opposing views of trade:
2. When people trade, both parties gain
Wealth is actually created by trade
Watch video: Stossel Micro 14- Is making
money good or bad?
Q2.1 (Multiple Answer) Sam values his boat
at $4,000, and Brenda values it at $9,000. If
Brenda buys it from Sam for $7,000, which
of the following is true?
1)
2)
3)
4)
5)
6)
7)
8)
Brenda loses $7,000
Brenda gains $2,000
Brenda gains $5,000
Brenda gains $9,000
Sam loses $4,000
Sam loses $7,000
Sam gains $3,000
Sam gains $7,000
Voluntary trade creates wealth
and promotes economic progress
Voluntary trade is expected to benefit both
parties involved, otherwise it wouldn’t
occur.
Potential trades:
1) Barter- exchange without money; goods for
goods
2) Money- exchange goods for money
Class Activity: What could reduce the value
created from a voluntary transaction?
Example: surfing the web looking for
airline tickets
The Importance of
Property Rights
2 Kinds of Property Rights:
(1) Common rights – everybody owns it
(2) Private rights – only one person owns
it
Q2.2 When property rights are clearly
defined and enforced, private owners will
1) use their property for selfish ends because
they have little or no incentive to consider the
desires of others.
2) develop and direct their property toward uses
that others value highly because the market
will generally reward them for doing so.
3) have little or no incentive to take care of their
property or conserve it for the future.
4) be unable to derive personal gain if they are
sensitive to the desires of others when
deciding how to use their property.
Property rights change the
incentives for individuals
Watch video: Stossel Micro 02economics of private property
Supplemental Video: Stossel- private
property and Native Americans (optional)
Q2.3 In the fictitious country of Econoland, the government
allows private ownership of chickens but not of bison. If the
demand for chicken and the demand for bison both
permanently increased in Econoland, we would expect
1. the population of chickens to rise and the population of
bison to fall.
2. the population of bison to rise and the population of
chickens to fall.
3. the populations of both chickens and bison to increase.
4. both chickens and bison to become extinct in
Econoland unless the government places the animals
on the endangered species list.
Incentives created by private
property rights:
Give proper care
Conserve for the future
Use resources in ways other people value
Mitigate possible harm to others
Production Possibilities
Curve
PPC also called PP Frontier
Graph:
Watch content video: Micro Chapter 2creating PPC
The PPC can shift
Graph:
Watch content video: Micro Chapter 2- shifting
PPC
The PPC can shift
Watch video: A Knight’s Tale- PPC shift
A great example of trade-offs comes from the life of a fulltime student. Such students can be imagined as having
only two uses of their time- studying and socializing- and
two outputs from those uses- knowledge acquired and
social satisfaction. If a student is efficient, he or she
cannot increase the amount of knowledge acquired in
college without giving up social satisfaction. The
opportunity cost of one more unit of social satisfaction is
some amount of forgone knowledge, and the opportunity
cost of another unit of knowledge is forgone social
satisfaction. This production possibility frontier can shift
out along each axis. A speed-reading course moves the
curve out along the axis for knowledge acquisition,
allowing the student to obtain both more knowledge and
more social satisfaction (because some time that can be
saved from studying can be shifted to socializing).
Q: Draw the production possibility frontier implied in this
story. List one other example of a technical improvement
that shifts the frontier out the learning axis, and one other
that shifts it out the social satisfaction axis.
Q2.4 Over time, an increase in a person's
education (i.e. stock of human capital) will
1. shift that person’s production possibilities
curve inward.
2. cause a person to operate inside its production
possibilities curve (i.e. become unemployed).
3. shift that person’s production possibilities
curve outward.
4. eliminate the basic economic problem of
scarcity.
Trade, Output, and
Living Standards
My wife and I needed to move 40 pieces of fencing, all
with nails in them, from behind the house out to the
street, and the nails had to be removed before the trash
collectors would take the fencing. How to organize the
task? There are three activities: dragging the wood,
pounding the nails with a hammer so the heads stick up,
and pulling the nails out with pliers. We figured that I
have an absolute advantage in all three activities, but my
wife probably had a comparative advantage in using the
hammer. To minimize time spent on the activity, I
dragged the wood, she hammered, and I plied. As the
morning progressed, we each got faster at our tasks- our
production possibility frontiers moved outward. By the
end of the task, she may have developed an absolute
advantage at hammering, so that our technological
improvements increased each of our comparative
advantages in the three tasks.
Q: Having developed our skills in these tasks, should we
now go into business offering our services in removing
fencing? Why or why not?
Law of Comparative Advantage
Make the good for which you have a low
opportunity cost and trade for the good for
which you have a high opportunity cost.
Translation: make something you’re good
at and trade for something you’re not good
at.
Q2.5 According to the law of comparative
advantage, both individuals and nations will
be able to produce a larger joint output if
each productive activity is undertaken by
1. the high opportunity cost producer.
2. the low opportunity cost producer.
3. the producer who is able to hire workers at the
lowest wage.
4. the party that can complete the productive
activity most rapidly.
Q2.6 If Kim can either wash 10 cars or wax 2 cars
during a day, and Vince can either wash 17 cars or
wax 2 cars during a day, then according to the law
of comparative advantage,
1.
2.
3.
4.
Vince's opportunity cost of waxing a car is less than
Kim's.
their total output can be expanded if Kim specializes in
waxing and Vince in washing.
their total output can be expanded if Kim specializes in
washing and Vince in waxing.
it would be impossible for Vince and Kim to increase
their total output through specialization and mutual
exchange.
Watch video: Stossel Micro 13Investment versus giving
Watch video: Made in America- Welch’s
juice
Importance of Comparative Advantage
Low opportunity cost
Comparative advantage
Specialization
Division of labor
Voluntary trade
Increased wealth
Watch video: Pawn Stars- Haggling 101
Adam Smith, Wealth of Nations
“I have seen a small manufactory of this kind where ten
men only were employed, and where some of them
consequently performed two or three distinct operations.
But though they were very poor, and therefore but
indifferently accommodated with the necessary
machinery, they could, when they exerted themselves,
make among them about twelve pounds of pins in a day.
There are in a pound upwards of four thousand pins of a
middling size. Those ten persons, therefore, could make
among them upwards of forty-eight thousand pins in a
day. But if they had all wrought separately and
independently, and without any of them having been
education to this peculiar business, they certainly could
not each of them have made twenty, perhaps not one pin
in a day.”
Self-sufficiency is the quickest
and most absolute path to
poverty
Economic Organization
Society’s three questions:
1) What to produce?
2) How to produce?
3) For whom to produce?
Watch content video: Micro Chapter 2economic organization
Question Answers
Q2.1 = 2 & 7
Q2.2 = 2
Q2.3 = 1
Q2.4 = 3
Q2.5 = 2
Q2.6 = 2