Econ 2000 Section 1 – Lecture Notes
Slide 1: Climbing the Economic Mountain
In order to help you understand where you are, where you have been, and where we are
going, I have created this diagram that shows our ascent into economic knowledge.
Slide 2: Basic Economic Principles
This first section is about the basic principles of human behavior that define the economic
way of thinking.
Slide 3: Overview
 When I asked my academic advisor what economics was, she said its about Supply
and Demand. I asked if they were really going to stretch that out over a whole four
month semester. She said actually they usually stretch it out over two. But
economics is more than supply and demand it’s a study in decision making. We are
going to talk about what economics actually is and how we can use economics as a
science in order to answer questions about the world around us.
 Then we are going to talk about some basic terms and definitions that you need to
understand as we move throughout the semester.
 Then we will talk about the ten key elements of economics and how to understand
and use the economic way of thinking in order to figure out the mysteries of the world
around us.
 Lets start by examining a question to see how economists would look at it versus
other groups of people.
Slide 4: Is Life Getting Better or Worse? (1)
Times magazine has declared this last decade the worst peacetime decade in history. It
did start out with the most controversial election in U.S. History (2000: Bush over Gore),
followed by terrorists attacks of September 11th, two wars (one in Afganistan and one in
Iraq), and the worst economic downturn in recent memory.
Slide 5: Is Life Getting Better or Worse? (2)
NBC and the Wallstreet Journal administered a poll asking individuals to rate this past
decade as awful, not good, fair, good, great. Most people rated it as either awful or not
good.
 Was this decade the worst in recent history and is life getting worse?
 Maybe the best way to answer this question is when would you like most to be alive
(the mark of the success of a time period should probably be how much people want
to live there). Who would rather be living in the 1950’s rather than now, who would
rather be living around 1900?
Slide 6: Is Life Getting Better or Worse? (3)
We use economics to answer questions about the world around us in an objective and
scientific way. For example, we will start by asking the question about whether life is
getting better or worse. Many people say that life is getting harder and more complicated
and that we should return the good old days where things were simple and easier. People
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say that today, there is more crime, disease, world problems, etc. So what objective
measures should we look at regarding whether or not life is getting better or worse?
 Life Expectancy: A longer life is certainly better than a shorter life (if you don’t
think so, you should probably reevaluate how you are living your life).
 Health: Healthier lives tend to be better than lives that are less healthy. The better we
can treat illness and injury the better off we are.
 Income: The more purchasing power we have to buy more stuff, the better off we
might be.
 Education: The better educated we are the better life tends to be. There was a time
when few people could even read or write, now many people (including you guys are
going to college).
 Entertainment: The more entertaining things we have to amuse ourselves, the better
life tends to be.
Think about these as we move through the next few slides talking about how the quality
of life has changed over recent years.
Slide 7: Is Life Getting Better or Worse? (4)
 Think about what we just talked about as we watch this video clip from ABC’s John
Stossel. Mr. Stossel is a news correspondent who deals in getting to the objective
truth of the matter and so has provided us with many video clips that relate to
economics, some of which we will be watching throughout the year.
 Watch Stossel Macro 1 Video Clip: Is Life Getting Worse (5:08)
As the movie mentions, the killer diseases have been eliminated or contained. Its true
that cancer rates are higher today but that’s because we can better diagnose cancer
and people are living long enough to get cancer (before people would just die). As
the clip mentioned, people are living 30 years longer today than they did 100 years
ago. Crime is down, pollution is down, jobs are better and safer than they used to be.
Life as a whole is just getting better and better by nearly every objective standard, If
it does not seem that way then it is likely the result of the increased exposure that we
have to the knowledge of the bad things because of the media and the internet (years
ago, when bad things happened we just did not know about them, now we have
instant information).
Slide 8: Who’s got the better mustache?
This is a picture taken by one of my former students when John Stossel gave a
presentation here at Florida St. University last semester. I spent 3 weeks growing out my
mustache in honor of his arrival.
Slide 9: Is Life Getting Better or Worse? (5)
 Just look a the changes in our transportation over the years. We have gone from
horse and buggy to the types of cars you see today. Now are cars have seatbelts,
airbags, anti-lock breaks, power locks and windows, air conditioners, multi-disk cd
players, etc. I could drive my car with my seatbelt on and the air conditioner blasting
and listen to my 50 cent CD and then change over to Hank Williams Jr. with the
comfort knowing that if I do get in a wreck a big inflatable bag will pop-out and
protect my head.
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Nowadays we even have flying cars that you can drive or fly around at your leisure.
Can a decade with flying cars really be that bad.
Slide 10: Is Life Getting Better or Worse? (6)
 Look at how computers have changed. This computer was big in the early 90’s, less
than 20 years ago and why not, it has a 16 MB capacity (meanwhile, today, I am
running this powerpoint off of a flash drive the size of my thumb that has a 64000
MB capacity (notice that, even for $8,500, monitor and mouse are not included).
Notice that for that $8,500, the monitor and mouse are not included
Slide 11: Is Life Getting Better or Worse? (4)
 Look at the medical kits that doctors worked with back in the late 1800’s (yes that is a
saw), as compared to what doctors are working with today. Its no wonder the price of
medical care is increasing.
 Look at early video games compared to today’ video games. When Super Tecmo
Bowl came out it was the greatest thing ever. My friends and I used to play for hours
(I could be the Raiders and get Bo Jackson and just run over everybody), but look at
the games today. Players went from blinking dots to unidentifiable pixels, to being
able to recognize individual muscle groups.
 We have such amazing things now that people take them for granted
Slide 12: Is Life Getting Better or Worse? (5)
 We are so used to how great things are that we forget how much better things have
gotten and now only find time to complain that things are not even better!
 Watch Louis C.K. Conan YouTube Clip: Everything is Amazing, Nobody is
Happy (4:11)
Slide 13: The Study of Economics (1)
Economics is defined as the science of how individuals make choices under scarcity
1. Science: refers to developing and testing objective theories. This is important
because when people are confronted with economic issues and questions they tend to
have very strong opinions about what is right, this is something that is unique to
economics more so than other scientific disciplines.
 For example, within the science of astronomy, there is a great debate as to
whether or not the universe is open and infinitely expanding or closed (ends
somewhere), but most non-astronomers don’t have an opinion (they certainly
don’t get into fights about it).
 However, when it comes to economic issues such as taxes, subsidies, minimum
wage, economic freedom, etc., everyone has an opinion and most people think
they are right. These conflicts can get serious (wars are often fought over it).
These opinions are often based on family, friends, experience, political parties,
personal ideology, but rarely are they based on an understanding of economics.
So this class is designed to give you the objective understanding so that you can
form opinions based on the real uncontaminated facts.
2. Individuals: Economics is the study of how individuals or a group of individuals
make decisions. True economists never say things like “France is mad at Germany”,
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we want to know who in France is mad at who in Germany. Economists examine the
behavior of people.
3. Choice: is the act of selecting among alternatives. Economists are interested in the
choices that people make and why they choose to do some things rather than others.
Why did you choose to come to class today, why did you choose to drink until 3:00
AM?
Slide 14: The Study of Economics (1)
4. Scarcity: The concept that there is less of something freely available from nature
than people would like. For example, there not enough apples available so that
everyone in the world can have as many apples as they would like. Almost
everything is scarce
 Time is scarce in that there is not enough time available so that everyone can have
as much as they want. You always want more hours in a day.
 Money is also scarce as there are plenty of people who don’t have as much money
as they would like to have.
 There are not enough Ferrari’s around so that everyone can have as many as they
want. If there were, then I would have four or five sitting in my drive way.
Instead, I have a Honda Civic.
Those things that are scarce have a price, those things that are not scarce do not have a
price (sea water, air).
Slide 15: Scarcity (1)
1. Poverty is a relative term: what is poor today and here (in the U.S.) was not poor in
the past (even the richest of the rich of the middle ages would be considered fairly
poor by the today’s standards – no television, internet, electricity, running water) or
somewhere else (Sub-Sahara Africa).
2. Watch Stossel Micro Clip – Poor in the U.S. (3:03)
A. Scarcity is objective (a fact based on observable phenomena, not influenced by
opinion. Poverty is subjective (depends on personal preferences and value
judgments). Even the rich are affected by scarcity (Bill Gates does not have as
much time as he would like).
Slide 16: Scarcity (2)
3. Scarcity necessitates rationing:
A. There are many ways to ration: How things are rationed will influence peoples’
behavior.
 Ration to those with political power and connections (through government
sector)
 First come, first serve: ration to those who are willing to wait the longest
(WVU football games before lottery, Duke basketball tickets).
B. In a market economy, we ration based on price (who is willing to pay the most).
Tends to be productive because it encourages people to produce.
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Slide 17: Scarcity (3)
Competition leads to discovery and innovation, better goods, higher wages, more
efficient outcomes (similar to natural selection – only the strongest and best survive,
while those who were making losses (weaker) get eliminated. So you are only left with
productive firms).
Slide 18: What do we do in the face of scarcity?
 When will the world run out of oil?
World Oil Reserves
60 billion
531 billion
1 trillion
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
World Oil Use
6 billion
16.5 billion
26 billion
math YTD
10 years
32 years
38 years
Year
1920
1970
2000
Today, we have over 3 trillion barrels in our current supply
Watch Stossel: Myth 10 – we are running out of oil (3:26)
Picture:
Slide 19: Resources
Resources: human knowledge and ingenuity make inputs useful (Same amount of the
natural resources as the caveman).
1. Human Resources: knowledge, skill, and strength ex. getting your degree, Myron
Rolle (Rhodes Scholar and NFL Prospect)
2. Physical Resources: tools, machines, buildings
ex. B&E, computers
3. natural resources: land, mineral deposits, rivers, oceans ex. coal
Capital enhances our ability to produce in the future (investing in capital can increase the
future availability of goods).
Slide 20: Example of Human Capital
Picture of 2008 World’s strongest man competition in Charleston, WV.
Slide 21: Economic Way of Thinking
Things are not always as they appear (illusion picture: kid with head in the sand)
Slide 22: #1 Incentives Matter
Incentives matter: As the personal benefit from an option increases, a person will be more
likely to choose it. If the cost increases, people will be less likely to choose it.
 Ex. Money Game: $.01, $1, $5, $10
 Ex. Killer seatbelts: seatbelt laws made it safer to drive, which leads to more reckless
driving and more accidents. So while there were less fatalities per accident there
were more accidents and an overall increase in the number of fatalities (also more
pedestrians were killed). Imagine how safe driving would be in extremely dangerous
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cars (say a spear sticking out of the steering wheel and aimed at your chest. In fact,
what do you do in a car that is safe enough to flip and roll a bunch times and leave the
driver relatively unharmed? You drive it around a track at 200 MPH in bumper to
bumper traffic.
Ex. Even young children understand this concept. My professors daughter was in a
fifth grade class where the teacher would give a spelling test on Monday and if the
students aced the test then they got a harder test with harder words on Friday, but
worth the same amount of points. So my Professor’s daughter would intentionally
miss words on Monday’s test to take the easier test on Friday.
Ex. Prices: when price goes up, people buy less and suppliers will want to produce
more. Eventually inventories are accumulated to where sellers need to lower price
causing buyers to buy more.
What do you think would happen if there was a large increase in the price of gasoline
(more car-pooling, walking/biking/taking the bus, switch to more fuel efficient cars,
etc.). This behavior is always predictable.
Slide 23: #1 Incentives Matter (2)
 Watch Office Space Movie Clip (2:56)
 Peter has no incentive to work any harder than he already is so they offer him an
ownership stake in the company so that the better the company does the more he gets.
This is what economics often studies: How to use the incentives that people face to
accomplish mutual goals. You want to align the incentives of others with your
incentives in order to get these things accomplished.
Slide 24: #1 Incentives Matter (3)
The predictability in human behavior as a result of changing incentives is applicable to
everyone:
 Students: Imagine if I decided that no matter what anyone in class did, I would give
you a C for the semester. What would happen to your incentive to work and learn.
 Politicians: Politicians respond to incentives just like everyone else, usually in a way
that causes them to maximize their votes. This is often why good politics is not
necessarily good economics.
 Altruists: The Missionaries of Charity attempted to open a shelter for the homeless in
New York with a lot of government regulations and bureaucracy which made it more
expensive and they eventually left to open one elsewhere. People are more likely to
dive into the shallow end of a pool to save someone than a rushing river with heavy
currents (higher costs). People are more likely to take a bullet for their significant
other, child, or other blood relative than for a total stranger (lower benefits).
 Criminals indeed behave rationally: It has been statistically shown that burglars, even
when they might be stoned out of their gourd, are much less likely to try and rob
houses with the protected by ADT sign out front when compared to houses without
the sign (higher chance of getting caught increases the costs).
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Slide 25: #1 Incentives Matter (4)
Individuals are rational and will get the most out of their limited resources
a. When choosing among things of equal benefit, the economizer will choose the
cheapest option (prefer a case of beer as much as a bottle of rum, you should buy
which ever is cheaper)
b. When choosing among options of the same price, the economizer will choose the
option that provides the most benefit. (if a case of beer and a bottle of rum each
cost $10, then you should get the one you like best)
c. Preferences of individuals are revealed by the choices they make.
Ex. One person may get more utility from partying than studying, and thus, fail.
This decision is rational for him or her, but may not be rational or right for
everyone.
Ex. Even what may seem outlandish to you may be rational to someone else
(smoking with lung cancer, holding electric fence collar).
Slide 26: #1 Incentives Matter (5)
Utility: The subjective benefit or satisfaction a person expects from a choice or course of
action. It’s the warm glowing feeling you get when you bite into your favorite dessert or
get an A on an exam, or when you are dancing, singing in the shower, running or doing
whatever your favorite activity is.
 Utility is different from person to person. For example, I prefer rum, but it makes my
friend sick. It does not make sense to do interpersonal utility comparisons. For
example when the hospital asks you on a scale of 1-10 how much pain are you in and
you say 7, that does not mean that your condition is worse than someone who says 6
as people have different pain tolerances.
Slide 27: #2 There is no such thing as a free lunch (1)
The use of resources to produce one good diverts those resources from the production of
other goods
 We would all love all the time and money in the world to be able to do anything and
have everything that we want but, because of scarcity, it does not work out like that.
We have to choose, do I want to go to class or do I want to sleep in, do I want to buy
the textbook or new shoes, etc.
 However, there is a deeper concept to this principle. Even if someone gives you a
free meal, that meal includes resources that cannot be used elsewhere. If someone
gave you a textbook then that is paper and ink that cannot be used elsewhere. So just
because it is free to you does not mean it is free to society. This concept also applies
to everything. If the government provides something to its citizens (like a new park,
hospital, or health care), it is not free, but is paid for through taxes and involves
resources that could not be used on anything else (library or school).
Slide 28: #2 There is no such thing as a free lunch (2)
Opportunity cost is just the highest valued alternative that is given up when making a
choice
 What is your highest valued way of spending the hour of time that you are using
when coming to class (that is your opportunity cost of coming to class)
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When you spend $15 on a cd, the highest valued foregone use of that $15 is the
opportunity cost of that money
Ex. Mandatory airbags in automobiles save about 400 lives a year and cost $50
billion dollars, maybe the 50 billion dollars could have saved more lives somewhere
else (AIDS vaccine). Economist can put a price on life, is just in terms of other
foregone lives.
Slide 29: #2 There is no such thing as a free lunch (3)
“With every choice you risk the life you would have had; with every decision, you lose
it.” – Richard Bach (author of Jonathon Livingston Seagull)
Slide 30: #2 There is no such thing as a free lunch (4)
 The biggest cost of coming to college is usually the opportunity cost of foregone
earnings, or what you would have earned had you been working at a job with your
high school degree. Most people out of high school can land a job making between
$20,000 and $25,000 a year, so your opportunity cost of a 4 year degree would be
between $80,000 and $100,000.
 This is why so many athletes forgo their final years of college and turn pro instead.
This is a picture of both Cam Newton and Andrew Luck. Cam Newton decided to
forgo his senior year at Auburn and was drafted first where he signed a 4 year 22
million dollar contract. How many of you would quit school if you had a job that
paid $5.5 million a year. Well Andrew Luck did, he was projected to go first but
decided to remain at Stanford for his senior year.
Slide 31: #2 There is no such thing as a free lunch (5)
Failure to understand this principle is one of the biggest mistakes made in economic
reasoning.
1. Ex. There is a cost to bailing out these companies.
 American International Group (AIG): $180 billion
 General Motors: $25 billion
 Total: over $700 billion
In order to pay for the money that these companies received, the government is going
to have get money (through borrowing or taxes) which will give people less money to
spend elsewhere and hurt other businesses (those that were doing well before). This
is unlikely to stimulate the economy. More government spending now leads to more
taxes later. People know this and they won’t increase spending.
2. There is a cost to the recycling programs that are implemented so that the programs
may not be worth the benefit that they provide. Many people think that economists
hate the environment, but that’s not true. Economists love the environment, we just
care about outcomes more than intent. For Example, my office mate up at WVU took
pictures of these two recycling trucks parked and running idly with exhaust pumping
into the air for over an hour while the workers collected recyclables. Many recycling
programs hurt more then they help and the money spent on these programs could
have certainly been spent on other things.
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Slide 32: #3 Decisions Are made at the Margin (1)
 Individuals focus on the difference between the costs and benefits of two alternatives.
Don’t confuse this with total costs and total benefits (not all or nothing decisions, but
rather additions to or subtractions from our current condition). The word marginal
can be substituted with additional (think additional costs and additional benefits).
 Ex. Ponderosa buffet: All you can eat bar: $7.50, steak dinner had steak and all you
can eat for $9.00. Marginal benefit of steak dinner is steak, marginal cost is $1.50
 Ex. Marginal benefit of super sizing your extra value meal is bigger fries and drink,
marginal cost is the $0.49.
 Ex. Option A: drive to Miami: it takes 8 hours and cost $100
Option B: fly to Miami: it takes 3 hours and cost $400
Marginal benefit of flying is 5 hours, marginal cost $300
Fly if you value your time at more than $60.00 an hour.
 Ex. The reason the room will be fuller during exam days (the marginal benefit of
coming to class outweighs the marginal cost of coming to class for more students on
exam days)
Slide 33: #3 Decisions Are made at the Margin (2)
 Law of Diminishing Marginal Utility: the more you consume of something, the less
you like each additional unit of consumption.
 At an all you can eat buffet, you probably go back three or four times. You get a lot
of benefit out of eating that first plate of food and maybe a lot out of the second, but
you will get less benefit out of the third and even less out of the fourth.
 Play Banana Eating Contest Game! – Show Results (possibly graph)
Slide 34: #3 Decisions Are made at the Margin (3)
Adam Smith who was the father of modern economics had a dilemma that he just could
not figure out. Why was water, which is essential for human life, so much more relatively
cheap than diamonds which are relatively useless. As it turns out Adam smith was
confusing total value and marginal value.
 The total value of water is much higher than the total value of diamonds. However,
we have so much water available to us that the marginal addition of one more gallon
of water would not exceed the marginal addition on one more diamond. (Imagine
you were trucking through the dessert and someone offered you a choice between a
gallon of water and diamond, which one would you take?).
 Referring back to the Ponderosa Example: Given that we were going to get buffet
anyway, the right argument was the steak worth $1.50, not was the meal worth $9.00
Slide 35: #3 Decisions Are made at the Margin (4)
 Why do the best professional wrestlers and actors make so much more money than
the best nurses and teachers. After all, actors and wrestlers only entertain us, but
nurses help keep us alive and teachers are responsible for our education. Is the
system flawed?
 There are plenty of good nurses and teachers out their, but not that many good actors
and wrestlers, so the marginal value of a top professional wrestler or actor is higher
than a great nurse or teacher
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Slide 36: #3 Decisions Are made at the Margin (5)
 Why do people who rationally choose to get married or commit to a serious
relationship with someone that they truly love choose to cheat on his or her spouse?
 The answer lies in diminishing marginal utility. Within any given week, the first hour
with your affair is worth more than the 100th hour with your spouse.
Graph:

Think about your favorite song of all time. If you love it more than any other song,
then why do you ever listen to anything else. (after listening to it over and over, it
starts to lose its appeal).
Slide 37: #3 Decisions Are made at the Margin (6)
Remember that people respond to incentives and make decisions at the margin, therefore,
a stepwise punishment may be more effective then a capital punishment system.
 Ex. Speeding: when speeding, a person gets a more significant penalty if they are
caught going 10 miles over the limit than some amount less than 10 miles over the
limit. If you go incredibly fast (100 mph) then you may get reckless driving (higher
dollar amount, more points on your lisence). This will keep people who choose to
speed from going to fast. Otherwise, those who go 1 mile over the limit could just go
50 mph over the limit.
 Ex. If you impose the death penalty for robbing someone in an attempt to get rid of all
robberies then we will still have some people who choose to rob people, but now they
are more likely to kill people as well because there is no marginal cost to doing so
and it prevents the person you rob from pointing you out. So it may be better to have
a stepwise punishment system.
Slide 38: #3 Decisions Are made at the Margin (7)
 Ex. Imagine cleaning your room: the benefit of cleaning your room is very high in
the beginning but as the room gets cleaner, the benefit decreases and the cost
increases. Cleaning your room past a certain point is inefficient. Being too organized
and too messy are both inefficient.
 Everyone in here could get a 4.0 if they really wanted to, the cost just might be too
high (too many hours studying, cost of tutors, foregone social life).
 Steven Landsburg: If you have never missed a flight then you are spending too much
time hanging around in airports
 Is it a good idea to get rid of all pollution? Nobody drives, manufactures, etc. This is
why economists invented tradeable pollution permits
 Is it a good idea to make airplane travel perfectly safe? Shop for security over
happiness and you buy it at that price.
 Economics quote: If its worth doing, its worth doing imperfectly
Martial arts quote: If its worth doing, its worth doing poorly, until it can be done well
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Slide 39: #3 Decisions Are made at the Margin (8)
Watch Along Came Polly Video clip: (2:18)
Both people are suffering from being at extremes, they would be better off if they came
back towards the middle (like Siddhartha Guatama – achieved enlightenment through the
middle path).
Slide 40: #3 Decisions Are made at the Margin (9)
 Although gathering information can help us make better choices, it is costly and so at
some point the benefit of gathering even more information would not be worth the
cost and so people will rationally choose to not be fully informed when making
decisions.
 Ex. This is why people gather much more information when buying a new car then
when buying new pencils (however, even at some point people stop gathering
additional information when buying a car). Because it is costly to acquire
information, we typically do not have full information when making decisions.
Slide 41: #4 Voluntary Trade Promotes Economic Progress (1)
 Sometimes the line between coercion and voluntary behavior gets pretty blurred, so
lets look at some scenarios:
 Lets say you walk by a vendor on the side of the street selling hot dogs and he asks
you if you would like to buy one. You politely refuse and say no thanks and just keep
on walking. Do you think he is going to chase you down and make you buy a hot
dog?
 What if your walking down the street and a man comes up to you and points a gun at
you and says give me all of your money! You politely say no thanks and just keep on
walking. What do you think the robber might do? Can you tell the difference
between the two scenarios.
 There is only one cable company in town and you choose not to get cable from them
so you have no cable (coercion?) - No
 Your lost walking through the desert and you come across a kiosk selling bottled
water for $1,000 a bottle. You refuse to pay (coercion?) – No, he has no obligation to
sell you water (think would you have been better off had he not been there).
 Government tells you that you owe x amount of money in taxes, can you refuse to
pay? (coercion?) – Yes
Slide 42: #4 Voluntary Trade Promotes Economic Progress (2)
 Because the value of goods are subjective, voluntary exchange will only take place
when it makes both parties better off.
 Play candy game! (Hand out EC activity)
 My Professor loves onions but hates tomatoes, while his wife loves tomatoes but
hates onions, so when they go to a restaurant and order salads he trades his tomatoes
for her onion and the value of both salads increase.
Slide 43: #4 Voluntary Trade Promotes Economic Progress (3)
Economists know this all too well. A market for drink tickets broke out at the last
economic conference I went to.
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Slide 44: #4 Voluntary Trade Promotes Economic Progress (4)
I can’t knot clothes or grow food or build cars, but I can teach economics. Trade allows
me to spend my time teaching economics and still have all of the clothes, food, and
transportation that I need because I essentially trade my economic lectures for the stuff I
need via a medium of exchange known as money.
Slide 45: #4 Voluntary Trade Promotes Economic Progress (5)
Ex. LeBron James is tall and athletic and therefore can clean his house a lot quicker then
a maid can. However, he should still hire a maid because he can use that time to do
commercials or hold press conferences about “The Decision” and make more money then
he would pay the maid to clean his house
Ex. Bob’s father makes $20 an hour, Bob makes $5 an hour. It takes Bob 5 hours to
mow the lawn, while it only takes Bobs father two hours to mow the lawn. Bob should
mow the lawn ($25 less then $40). Chart it out:
Bob
Bobs Father
$ per hour
$5
$20
hours to mow lawn
5
2
Total Cost
$25
$40
Try Another Example:
Winston
Janine
wage (per
hour)
$60
$25
typing speed (words per
minute)
120
60
cost of typing 120
words
$60
$50
Slide 46: #4 Voluntary Trade Promotes Economic Progress (6)
International trade allows firm’s to sell to customer’s world–wide, so the firm can adopt
more efficient large scale production methods.
Quantity
0
1
2
3
4
Cost
$1,000,000
$1,100,000
$1,200,000
$1,300,000
$1,400,000
Average Total Cost
$1,100,000
$600,000
$433,333
$350,000
Slide 47: #5 transaction costs (1)
Imagine that you are laying in bed craving a Big Mac. Part of the cost in obtaining the
Big Mac is the time and effort spent driving to McDonalds to get it. These costs are
known as transaction costs.
Picture:
Slide 48: #5 Transaction costs (2)
Middlemen reduce transaction costs (economies with more middlemen tend to be richer)
 Ex. grocery stores are middlemen so people do not interact directly with farmers for
every item. (Wal-mart is the biggest example of a middle man). Imagine if we had to
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
go to all of the individual ranchers and farmers in order to get our food for our dinner.
It would take forever to find these people and complete all of these transactions.
Ex. CBI: funnels produce from many producers to grocery stores and restaurants.
The internet helps bring buyers and sellers together, and thus, reduces transaction
costs and helps to increase value (ex. ebay).
Slide 49: #6 Prices bring the choices of buyers and sellers into balance
 Naturally, sellers want to sell things for as high a price as possible in order to make
the most money. So why are prices not all sky high?
 Naturally, buyers want to buy things for as low a price as possible. So why are prices
not all really low?
 The conflicting forces of sellers wanting to sell for high prices and buyers wanting to
buy for low prices are brought into harmony by market forces. If sellers prices are
incredibly high, no one will buy their stuff and so they will have to lower prices.
Conversely, if everyone is buying these items so that sellers are constantly running
out than sellers will raise the price. So long as prices are not impeded by any laws
and regulations then the market will work beautifully at avoiding shortages and
surpluses of goods. We will study this in great detail later in the next section of the
class
Slide 50: #7 Profits direct businesses toward activities that increase wealth (1)
 Lets go through an example: Say you are making and selling economics t-shirts and
it costs $8 to make, print, and sell each shirt. You decide to make and sell 10 shirts so
your costs are $80. You then sell the shirts for $10 a piece. Your total revenue will
be $100, giving you a profit of $20. This means you have taken all the resources that
go into making shirts (cotton, ink, time, machines, etc.) and produced something that
people want more. So long as you can continue to do this you will make a profit and
your business will expand and grow.
Slide 51: #7 Profits direct businesses toward activities that increase wealth (2)
 Now, take the counter example: Say you are making and selling economics t-shirts
and it costs $8 to make, print, and sell each shirt. You decide to make and sell 10
shirts so your costs are $80. You find out that there just are not that many nerds like
me out there willing to pay for an economics T-shirt, so you can only sell the shirts
for $5 a piece. Your total revenue will be $50, giving you a loss of $30. This means
you have taken all the resources that go into making shirts (cotton, ink, time,
machines, etc.) and produced something that people value less. You essentially took
$8 worth of stuff and used it to produce something worth $5, or destroyed resources.
You will not be able to do this for very long and will go out of business, freeing up
those resources for productive use.
 Now, consider the recent government bailouts. The government took tax dollars and
gave it to companies who were making these losses (or destroying resources) in order
to keep these companies open so that they could keep on producing. This is why
most economists were very much against the bailout.
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Slide 52: #7 Profits direct businesses toward activities that increase wealth (3)
Watch “Its Always Sunny in Philadelphia: Business Failure Kitten Mittens Clip”
(1:06).
Do you think this product fulfills a need or want sufficiently to justify the use of the
materials to make it? In other words do you think this will make a profit or go out of
business. If a business like this does make losses and shuts down, is that a good thing or
a bad thing?
Slide 53: #7 Profits direct businesses toward activities that increase wealth (4)
 Are profits a bad thing? People are usually angry at those profit seeking corporations
who make tons of money. When gas prices go up, people need something to get
angry at so they yell about how much profit gas companies are making. In reality,
they were not making nearly as much profit as other companies at the time (like
General Mills for example), because there costs went up which is what caused the
price of gas to increase (just like we saw in the video, cheap oil is getting hard and
harder to find). But even if profits do go up, it just shows that they are taking
resources and turning them into something that people value. I want you to realize
that profits are a very good thing.
 Are losses a bad thing? Losses are certainly bad for the owners of the companies who
go out of business and in some cases for the employees. However, losses help keep
those inefficient producers form wasting resources so they provide a service from a
social standpoint. They keep people from taking perfectly good shirts and turning
them into economics T-shirts that nobody wants. However, even from the standpoint
of the companies and the employees, losses may be a good thing.
1. How many people here have switched major, either because you did not like the
major or because you were not doing well in it? Of those who have switched,
how many people are happier in their current major? I had a classmate at WVU
who went from the economics Ph.D. program to Law School and was much
happier because of it. He felt he fit in better and was somewhat happy that he
failed out of because he is now very productive as a lawyer.
2. Similarly, often people who are making losses will switch to businesses or other
industries where they are able to do better. This is good for both them and
society.
Slide 54: #7 Profits direct businesses toward activities that increase wealth (5)
 Stossel Macro Clip #3 – Unemployment and Labor Mobility (2:57)
 This clip aptly demonstrates how some people who lose their jobs will find even
better jobs. There will be some people who are worse off, but on average people will
generally be better off.
Slide 55: #7 Profits direct businesses toward activities that increase wealth (6)
 “The mark of your ignorance is the depth of your belief in injustice and tragedy.
What the caterpillar calls the end of the world, the master calls a butterfly” – Richard
Bach
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
There is no doubt, that people suffer when they lose their job and have to find new
ones, but change in almost any form always hurts and you may end up better off
because of it.
Slide 56: #8 People Earn Income by Helping Others (1)
 Many times, people get angry at the really rich such as the Warren Buffets and the
Bill Gates of the world because they think it is unfair for these people to have so
much while others have so little. Many people think that if Bill Gates did not make
10 billion dollars this year then other people would get that money and they would be
much better off.
 However, it is no the case that when Bill Gates makes a billion dollars that he takes a
billion dollar slice out of the economic pie, rather it is more appropriate to think that
if Bill Gates makes a Billion dollars than he has made the pie bigger and better by a
billion dollars.
 In order for him to make all that money he had to make something that people want
more than the money they pay for it. People are only willing to get it if it makes them
happier and more productive (so long as it happens through voluntary trade. Think
how much more most people can do now because of Bill Gates software.
Slide 57: #8 People Earn Income by Helping Others (2)
 Stossel Macro clip 3: Exchange and Wealth Creation (6:48)
 The video shows how Vanderbilt, Rockefeller, Ford, Dave Thomas, etc. made large
amounts of wealth through voluntary exchange. So long as they do it through this
voluntary exchange then everyone is made better off. If they do it though coercion
then people may be made worse off (William Baumol (1990) – Productive vs.
Unproductive Entrepreneurship). Bill Gates – productive entrepreneurship, Baby
Doc – unproductive entrepreneurship.
Slide 58: #9 Production of goods and services, not just jobs, provides the source of
high living standards (1)
 It is important to note that production, rather than jobs, is what is important for
economic growth and prosperity. This is something that people seem to not
understand on a regular basis
 In an effort to boost the economy, let me tell you about a few proposed plans:
1. Hole-Digging Decree: we pay half of all unemployed people a handsome wage to
dig holes (just dig them, I don’t care where), and then pay the remaining half to
fill them back up. This way everyone will be employed and the economy will be
stimulated. What do you think?
2. Window Breaking Bill: we pay people to go around and break windows. This
way it will create work for people who want to repair those windows and more
people will be employed and the economy will be stimulated. What do you
think?
 Both of these policies would create jobs… and a poorer economy because nothing is
being produced. The money spent to dig and fill holes and break and repair windows
has to come from somewhere and this money would have likely been spent on other
things. These policies reshuffle jobs, but do not create anything.
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Slide 59: #9 Production of goods and services, not just jobs, provides the source of
high living standards (2)
 The broken window fallacy is a real story told by Henry Hazlitt: A boy commits a
destructive act of breaking a window of a tailor and everyone laments the fortunes of
the tailor but then declares that the boy was a hero in that he helped revive the
economy because now the tailor will need to get the window fixed, which means the
window repairman will need to buy glass from the glazier and so on. However, what
is not seen is the loss from the baker when the tailor spends money on the window
and not bread. In the end, the village is really poorer by one window.
 Watch Stossell Macro Clip 4: Government, Spending, and Jobs – (2:40)
Slide 60: #9 Production of goods and services, not just jobs, provides the source of
high living standards (3)
As dumb as those policies sound, believe it or not, the government has enacted similar
such policies in an effort to stimulate the economy:
1. Agricultural Adjustment Act (1933): During the great depression when everyone was
starving to death and had no work, the government feared that farmers would be hurt
by falling prices so they paid farmers to destroy crops and wastefully slaughter their
animals to keep prices high (eventually ruled to be unconstitutional in 1936).
2. Car Allowance Rebate System a.k.a Cash for Clunkers (2009): The government, in
the effort to both stimulate the economy and protect the environment, paid dealers to
destroy cars by pouring sodium silicate solution in the engine and sending them to the
junkyard. 700,000 used cars valued over $2 billion were destroyed. When the
program ended, sales of new cars plunged and used cars were more expensive due to
reduced supply.
Slide 61: #9 Production of goods and services, not just jobs, provides the source of
high living standards (4)
 Does stimulus spending really stimulate the economy? Both president Bush and
president Obama used stimulus spending to promote economic recovery, but while
being very politically popular, does stimulus spending really help the economy
recover? Usually not, for several reasons:
1. Stimulus spending must come from somewhere. Whenever the government
throws out more money they must either raise taxes or borrow more money which
leads to higher interest rates – both of which leads to less private spending and
employment.
2. In a more direct way, whenever the government spends money on some things,
the private sector will be crowded out. When the government subsidizes General
Motors, then general motors competitors go out of business.
3. Government spending involves the transfer of wealth decided for political
reasons, which is different that private spending which involves the creation of
wealth decided by market efficiency. The more the government gets involved, the
more people try to gain wealth transfers and the less the get involved with wealth
creation (more lobbying and less production).
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Slide 62: #10 Economic Progress (1)
1. Investments in productive assets and in the skills of workers enhance our ability to
produce goods and services.
 As we mentioned before, right now you are making an investment in your
education by going to college. This will increase your knowledge and skills
making you able to produce more
 This machine is called a fellerbuncher, one person operating this machine can cut
down and strip trees 3 times faster than a worker with a chainsaw. Because the
guy operating the feller bunch can do the work of 3 men with chainsaws, he is
paid three times as much as the men with chainsaws. Now, just as we talked
about, you won’t need as many chainsaw wielding workers so they will go on to
do other things (such as hauling the trees to other locations).
Slide 63: #10 Economic Progress (2)
Please understand (and I’m sure you do) that when you make these investments, it
requires you to give up current consumption goods. While getting your college degree,
you are not able to earn as much income that you could use to buy things.
 Ex. Mankiw’s Apple Example: “You can pick apples or plant apple trees, in the first
case you have more apples today, in the second you have more apples tomorrow.
 Ex. The more cookie dough we eat now, the less cookies we can make. However,
the more cookie dough we invest into the oven, the more cookies we can eat in the
future.
Slide 64: #10 Economic Progress (3)
 The following is a clip from the movie “A Knights Tale” where the Knight has just
passed away before the final joust of the competition in which they are ahead so
much that he would just have to stay on his horse to win. So his servants illegally
masquerade as the expired knight in order to win the competition so they could sell
the prize and make enough money to spend immediately on food and travel.
However, one of the servants wants to invest the money so that they can make even
more in the future.
Watch the Clip “A Knights Tale – PPC Shift” (4:31)
Slide 65: #10 Economic Progress (4)
2. Improvements in technology spur economic progress:
 With improvements in technology, we can do more and more things. Before
electricity and before people had access to cheap oil from lamps, only the really
rich could afford candles with which to stay up and keep doing things at night.
The Poor just had to stop when it got dark. Nowadays, we can stay up and work
as late as we want.
 Think about how much more you can get done now that we have the internet and
computers compares to when we had just pencils, paper, and books. To do
reports for school, I used to have to go to the library and use the Dewey-decimal
system (does anybody even remember that) to find books and then write out the
notes from those books and then go home and use those notes to write a report.
Now we can just download information in a matter of seconds. (I feel sorry for
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
Melvil Dewey, the inventor of the Dewey-decimal system, whose life
achievement has been washed away, but look at what we have in its place).
Those countries with higher levels of technology are more productive and have a
higher standard of living.
Slide 66: #10 Economic Progress (5)
 Creative Destruction: The replacement of old products and production methods by
innovative new ones that consumers judge to be superior. This was a term coined by
a famous economist named Joseph Schumpeter. It refers to the idea that we keep
replacing old technology with newer and better technology.
 People used to have to listen to records, they eventually switched over to the 8 track,
then to the cassette tape, then to the CD. Nowadays, people are playing everything on
their MP3’s with digital music. That will have to last until we can figure out a way to
transmit songs telepathically.
Slide 67: #10 Economic Progress (6)
3. Improvements in economic organization can promote growth:
 We will talk about property rights in great detail later. Right now, property rights
are something we take for granted. We take for granted the fact that when we
buy, build, or expand on something that we get to keep it. However, in some
countries, property rights are not very secure and so people can have their
property taken away (if they have any at all). Think about what that does to the
incentive to grow.
 Economies that prevent competition through artificial barriers against foreign
trade or government sanctioned monopolies tend not to do as well (remember
what would happen to the value of the candy in class if intergroup trade was
taxed).
 The less personal and economic freedom that people have the worse off the
economy tends to be. This is something we are going to get into later in the future
sections.
Slide 68: #11 The Invisible Hand (1)
Invisible hand: (Adam Smith) Markets bring the self interest of individuals into harmony
with the efficient allocation of resources.
 Ex. lines at Walmart: Suppose a person was hired to make sure that everyone got
through the lines at Walmart as quickly and efficiently as possible. How would they
do that, put everyone in one line or equalize the lengths of the lines. Now, Lets say
that you want to get in line and there is no person their telling you which line to get
into. Which one do you choose (the shortest line). People will keep choosing the
shortest line on their own without anybody telling them until the length of the lines
are equalized. They are all just trying to get through the lines as fast as possible, and
in doing so, end up doing what is best for everybody.
 Ex. ask students what they do and make an example.
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Slide 69: #11 The Invisible Hand (2)
1. The crop freeze that caused the price of oranges to increase provided the information
to the consumers that it is time to cut back on the use of oranges (Consumers don’t
need to know the reason behind the shortage or even that there is one, they only need
to know that prices have increased – Hayek, 1945)
2. Consumers will cut back on oranges because they have gotten so expensive.
3. Prices encourage people to cooperate with others and use efficient production
methods (prices establish a profit-loss structure that motivates people to be as
efficient as possible). In the case of oil, it causes people to find alternative fuel
sources.
Slide 70: #11 The Invisible Hand (3)
 Watch Stossel Micro Clip #4 – The Invisible Hand (3:23)
 If you really love this invisible hand principle, then read “I, Pencil” – by Leonard
Read which is located on the common sense economics website.
Slide 71: #12 Secondary Effects (1)
 Henry Hazlitt quote: He believed the core foundations of economics boiled down to
this one principle
 He used the broken window fallacy to illustrate his point:
1. There is a parable where a child throws a rock through a window of a tailor and
people sympathize with the tailor about his misfortune, but also talk about how
this will stimulate the economy. This will be good for the Glazier (the person
who makes glass), and he or she will use that money to buy bread which benefits
the baker and the baker will use the money to buy shoes from the cobbler and this
will stimulate the economy (and so they conclude that this boy was not a vandal
but a public benefactor helped the economy).
2. However, the tailor who now has to buy the window would have spent that money
on something else to enhance his own wealth and happiness rather than replace
the window. So the boy actually made the town poorer by one window. Further
he ma have to close shop until he gets it replaced
3. Ex. If someone vandalized your car, then you would have to pay to repair it
instead of using that money on something else. Further, if they messed it up really
bad and you could not drive it then it reduces productivity.
Slide 72: #12 Secondary Effects (2)
 Ex. Yacht tax: In 1991, the marine industry was devastated by a federal luxury tax on
yachts. Viking yachts had to close its Florida manufacturing facility and lost 1,500 of
its 1,560 (roughly 96%) employees. The rich spent money elsewhere so the tax ended
up hurting the lower and middle class hardest by costing yacht makers their jobs.
 Ex. A trade restriction against foreign cars will help Detroit autoworkers, but hurt
Iowa farmers because of a retaliatory tariff against corn.
 Ex. The immediate and direct effect of drinking is the buzz you get. The secondary
and indirect effect of drinking is a hangover (or possibly jail time).
 1st graders and pencils: A WV teacher started providing pencils to her students and
then started paying for the used stub (10 cents and a new stub) so that she could keep
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students from losing them. They started sharpening their pencils a lot more and
created stubs as fast as she could make them.
Slide 73: 4 pitfalls to avoid in economic thinking (1)
We just talked about 10 elements to incorporate when engaging in economic thinking,
now we need to talk about some mistakes that you don’t want to make when engaging in
economic thinking.
Slide 74: 4 pitfalls to avoid in economic thinking (2)
 Economists make statements about the effect one change while assuming that nothing
else changes.
Ex. Ceteris Paribus (all things constant) would you expect people to buy more or
less roses if the price of roses increase (what about on Valentines Day)
 Sometimes data does not reflect economic theory, it is because the effects of all of
these changes are taken into account.
 Is it rational to buy more roses when their price increases? Yes if the MB of your
significant others happiness is greater then the marginal cost of roses at the new
higher prices.
 Same could be said for Eggs at Easter
Slide 75: 4 pitfalls to avoid in economic thinking (3)
 Ex. Government enacts a policy to regulate land inhabited by endangered species by
preventing the cutting down of trees or building within so many feet of an area where
the red-cockaded woodpecker is nesting, so people destroy the species natural habitat
before the species can nest there to avoid losing control over this land.
 A requirement forcing people to put suicide warning labels on anti-depressant drugs
caused depressed people to not buy the drugs resulting in even more suicides.
 A law requiring child resistant safety caps to be put in pharmaceuticals caused more
people to leave the bottles in plain site of the children (or even the caps off of the
bottles) so that more children ended up ingesting the medicine.
 The goal in all cases was to help people and animals but it does not always work out
that way. The politician who votes no on these things is going to be viewed badly.
Slide 76: The Nirvana Fallacy (1)
 A common extension of the fallacy of believing that good intentions do not equal
good outcomes is the nirvana fallacy. This is the common logical fallacy of
comparing the actual situation with an idealized alternative rather than with the
realistic one. People committing this fallacy might say that the current situation is
bad and so changes must be made because the alternative is better, when, in reality,
the alternative is worse.
 This mistake is commonly made with regards to sweatshop labor and child labor
overseas. Many people protest these types of employment, but so long as that
employment is voluntary then these people work there because it is better than their
other alternatives (lower paying factory jobs, hard work in the fields, child
prostitution, etc.)
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Slide 77: The Nirvana Fallacy (2)
 Watch Stossel Macro Clip 7: Are boycotts of sweatshop products helpful? (5:45)
 Imagine if people protested my chemotherapy treatment saying it should be illegal
because of all of the nasty side effects. My only remaining option would be to dies
fairly soon. Am I better off?
Slide 78: 4 pitfalls to avoid in economic thinking (4)
 Fallacy of Composition: the belief that what is true for one person is true for all.
 Ex. during an exciting play, if you stand you can see better. It does not mean that if
everybody stands, everybody will see better.
Slide 79: 4 pitfalls to avoid in economic thinking (5)
Just because two variables are related does not mean that one will cause the other. If X
and Y happen together it could be that X cause Y, Y causes X, or a third variable Z
causes X and Y
 A study showed that pitchers with a K in their initials (the baseball abbreviation of
strikeout) had more strikeouts and students with A and B in their initials did better on
school than students with C, D, or F in their initials. Do you think the initials really
caused performance
 Superstition: Ex. Not shaving until your team loses
 Manson’s story at CBI: Was fired and his wife put a hex on my supervisor who later
got sick from eating a turtle who ate a rattlesnake.
Slide 80: The Economic Way of Thinking
 This clip has a lot of the elements that we just discussed in it, so please make sure you
pay close attention and see if you can pick them out.
 Watch Stossel Micro clip 1: opportunity cost of lives (4:49)
Slide 81: Review (1)
 Scarcity is the concept that there is not enough of a good freely available from nature
so that people can have as much as they would like.
 Twelve key elements of economic thinking
1. Incentives matter
A. People respond to changing incentives in a predictable way
B. What is rational for one person is not rational for everyone
C. Utility: The subjective benefit or satisfaction a person expects from a choice
or course of action
2. No such thing as a free lunch (because resources are scarce, tradeoffs must be
made)
A. Opportunity Cost (the highest valued alternative that must be sacrificed when
choosing an option.
3. Decisions are made at the margin:
A. Know how to identify the marginal costs and the marginal benefits of making
a decision.
B. Understand the low of diminishing marginal utility and its implications.
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C. Understand the concept of the cost-benefit analysis and economic efficiency
(You should only do those things where the marginal benefits outweigh the
marginal costs).
D. People will rationally choose not to become fully informed when making
decisions
4. Trade promotes economic progress
A. Know the difference between voluntary and coerced
B. Know how trade creates value by putting goods into the hands of those who
want them the most
C. Trade makes larger output and consumption levels possible through
specialization. (The Law of Comparative Advantage)
D. Voluntary trade makes it possible to produce things at a lower cost through
mass production techniques
5. Transaction costs and middlemen: Transaction costs are the time, effort, and other
resources needed to search out and complete an exchange. Middleman reduce
transaction costs.
6. The economic role of profits and losses:
A. Profits occurs when resources are used to produce something of greater value
B. Losses occur when resources are used to produce something of lesser value
7. Productive activity creates wealth
A. Entrepreneurs who create things make everybody better off by expanding the
pie, rather than taking a slice of it.
8. Growth comes from investment, technology, and good institutions
A. Investment makes us richer, but costs in terms of current consumption
B. Improvements in technology spur economic progress (creative destruction:
replacing old products and production methods by innovative new ones that
consumers judge to be superior).
C. Improvements in economic organization can promote growth (private property
rights, competition, personal and economic freedom).
9. The invisible hand and the role of prices
A. The invisible hand: the tendency for people while pursuing their own interests
to promote the economic well-being of society.
B. Prices and market order: prices communicate information, coordinate the
actions of market participants, motivate economic players.
10. Secondary effects:
A. There are immediate effects (rich people pay yacht tax) and secondary effects
(poor people out of work).
Slide 82: Review (2)
1. Violation of the ceteris paribus principle: Only look at one change at a time
2. The belief that good intentions guarantee good outcomes: just because we want good
outcomes does not mean we get them.
3. The fallacy of composition: Please understand that what is true for one person may
not be true for all people
4. The belief that association = causation: just because two things happen together does
not mean that one caused the other.
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