Macro 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
A fellow economist mentioned his eighteen- and
fifteen-year-old daughters’ unusual behavior.
The older one, a freshman in college, brings her
laundry home and expects the younger daughter
to launder it. The younger daughter compliesbut each time she keeps a piece of clothing that
she likes most. Their father told this to the older
sister, who laughed and said that’s OK; when
she comes home and her little sister is away she
takes some of the little sister’s clothing. Both
sisters know all this, and both seem to view it as
a way of trading. Like most trading that is
voluntary, both sisters are better off. There are
gains from trade in “stealing” each other’s
clothes!
Q: What will happen to the gains from this kind
of trade as the sisters’ preferences for the
clothing they purchase become more similar?
Two opposing views of trade:
1. When people trade, one person gains
and the other person loses
Referred to as a zero-sum game
2. When people trade, both parties gain
Wealth is actually created by trade
Watch video: Stossel Micro 03-exchange
and wealth creation
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
Q2.1 Steve values his car at $4,000, and Jennifer
values it at $9,000. If Jennifer buys it from Steve
for $7,000, which of the following is true?
1. Steve gains $3,000 of value, and Jennifer gains $2,000
of value.
2. Steve gains $7,000 of value, and Jennifer loses $7,000
of value.
3. Steve gains $7,000 of value, and Jennifer gains $6,000
of value.
4. Steve and Jennifer both gain $7,000 of value.
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 private ownership of a resource is
clearly defined and enforced, the private owner
1)
2)
3)
4)
has little incentive to consider the wishes of others
when deciding how to employ the resource.
has little incentive to take care of the resource.
has a strong incentive to use the resource wisely and
to consider seriously the wishes of others when
deciding how to employ the resource.
has a strong incentive to consume the resource during
the period rather than conserving it for future use.
Property rights change the
incentives for individuals
Watch video: Stossel- Tragedy of the
Commons private property
Supplemental Video: Stossel- private
ownership and conservation (optional)
Q2.3 In the fictitious country of Lebos, the government
allows private ownership of pigs but not of cows. If the
demand for pork and the demand for beef both permanently
increased in Lebos, in the long run, we would expect
1. the population of pigs to rise and the population of
cows to fall.
2. the population of cows to rise and the population of
pigs to fall.
3. the populations of both pigs and cows to increase.
4. both pigs and cows to become extinct in Lebos unless
the government places the animals on the endangered
species list.
Incentives created by private
property rights:
1) Give proper care
2) Conserve for the future
3) Use resources in ways other people
value
4) Mitigate possible harm to others
Production Possibilities
Curve
Watch video: Cast Away- comparative
advantage
PPC also called PP Frontier
Graph:
Watch content video: Macro Chapter 2creating PPC
The PPC can shift
Graph:
Watch content video: Macro Chapter 2- shifting
PPC
Q2.4 Using a production possibilities curve, a
technological advance that increases the amount
of output for the same amount of inputs would be
illustrated as
1.
2.
3.
4.
a flattening of the curve.
a movement from one point to another point along the
curve.
an outward shift of the curve.
a movement from a point on the curve to a point inside
the curve.
Class Activity: Name one thing that would
allow Tom Hanks to produce more fire,
one thing to produce more food, and one
thing to produce more food AND fire
simultaneously. Draw three separate
PPCs to illustrate.
Trade, Output, and
Living Standards
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.
Watch video: Made in America- Barre
granite (in class)
Supplemental Video: Made in AmericaBarre granite (optional, longer version of
above)
Q2.5 Opportunity costs differ among nations
primarily because
1.
2.
3.
4.
nations employ different currencies.
nations have different endowments of land, labor skills,
capital, and technology.
nations have different religious, political, and economic
institutions.
the work-leisure preferences of people vary
considerably from one nation to another.
Importance of Comparative Advantage
Low opportunity cost
Comparative advantage
Specialization
Division of labor
Voluntary trade
Increased wealth
Watch video: Pawn Stars- Best of
bartering
Adam Smith, Wealth of Nations
“The greatest improvement in the
productive powers of labour, and the
greater part of the skill, dexterity, and
judgment with which it is any where
directed, or applied, seem to have been
the effects of the division of labour.”
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: Macro Chapter 2economic organization
Question Answers:
Q2.1 = 1
Q2.2 = 3
Q2.3 = 1
Q2.4 = 3
Q2.5 = 2