Economics on Main Street:
Concepts for American Voters
May 2012
Introductory Notes
• About the Prof (introduction, questions?)
• About the Students (please fill out & turn in)
• Sessions and Topics (see next slide)
Sessions & Topics
• Fundamental Tradeoffs and Economic Growth
• Markets Are Perfect, Except When They’re Not
• Income Inequality & Jobless Recoveries
• Public Goods & Sustainable Social Contracts
Fundamental Tradeoffs
and Economic Growth
(1) fundamental tradeoffs
Dylan, a sophomore at ISU, is considering what to
buy this week. He wants the latest IPod Touch and
Beats headphones. He wants a portable computer
so he can take some weekend trips and keep up with
class work. He wants to take his girlfriend out to
dinner at a really nice restaurant back home in
Lockport. One of the guys he shares an apartment
with has quit school and is leaving. Dylan wants a
room of his own. His part-time job is interfering with
his school work and he wants to quit work. He saw a
new mountain bike at that cycle shop near campus
and he wants it.
(a) Will all of Dylan's wants be satisfied?
(b) What will Dylan have to do?
What Dylan Wants
• scarcity and tradeoffs
unlimited wants, limited resources, choice.
opportunity cost in every decision.
• applications
society (limited land, labor & capital)
individuals (limited income, abilities & time)
organizations (human, financial & technical)
A Primitive Civilization
• we are a small primitive tribe
( our goal is simple: survival )
• what are our specific wants?
• what are our limited resources?
A Primitive Civilization
a (0, 15)
15
10
5
f (5, 0)
0
1
2
3
4
5
Shelter (covered rooms)
A Primitive Civilization
a (0, 15)
15
b (1, 14)
Production Possibilities
(given known resources)
c (2, 12)
10
d (3, 9)
e (4, 5)
5
f (5, 0)
0
1
2
3
4
5
Shelter (covered rooms)
PPF for a Primitive Civilization
a
15
b
c
Unattainable
10
d
5
e
Attainable
f
0
1
2
3
4
5
Shelter (covered rooms)
Production Possibilities
• resources, scarcity & opportunity cost
( opportunity cost = sacrifice / gain )
( all of our choices involve opportunity cost )
• increasing opportunity cost
why? unique resources and alternative uses
( consider tribe resources, food & shelter )
( a-to-b sacrifice of 1, e-to-f sacrifice of 5 )
( unique resources, start with low cost options )
Changing Slope of PPF
slope of PPF steeper as more shelter
is produced . . . . this reflects
increasing opportunity cost
a
15
b
c
10
d
e
5
f
0
1
2
3
4
5
Shelter
Production Possibilities
• resources, scarcity & opportunity cost
• increasing opportunity cost
• variety of applications
society & production decisions,
individuals & consumption choices,
households & competing uses of time
Scarce Resources, Basic Tradeoffs
a
b
Decisions Faced
by Every Society?
c
d
e
f
One Thing
Scarce Resources, Basic Tradeoffs
a
How Much Devoted
to Shelter (Housing)?
b
c
d
e
f
One Thing
Scarce Resources, Basic Tradeoffs
a
How Much Devoted
to Health Care?
b
c
d
e
f
One Thing
Scarce Resources, Basic Tradeoffs
a
How Much Devoted
to ANY GOOD?
(subject to increasing
opportunity cost)
b
c
d
e
f
One Thing
Scarce Resources, Basic Tradeoffs
a
b
Our Choices
As Consumers?
c
d
e
f
One Thing
Scarce Resources, Basic Tradeoffs
a
b
c
Home Improvement?
Dining Out? Travel?
d
e
f
One Thing
Scarce Resources, Basic Tradeoffs
a
b
c
Competing Uses of Time?
d
e
f
One Thing
Scarce Resources, Basic Tradeoffs
dual careers
$71,000
two flexible jobs
$56,000
$40,000
$18,000
one full time
one part time
Household Time
Scarce Resources, Basic Tradeoffs
a
b
c
Retirement Decisions
d
e
f
Time
Economic Decisions
• balancing costs & benefits at the margin
required tradeoffs (MC), willing tradeoffs (MB)
• society & production decisions
food vs shelter? guns vs butter? energy vs ???
who decides (a few alternative approaches)?
• a disturbing trend in our public discourse
diverse views do not preclude consensus, however . . .
it helps to agree on the required tradeoffs (PPF), . . .
when interest groups are the information sources.
a
Consider tradeoffs
associated with coal,
oil, natural gas & nuclear.
b
c
d
e
f
Energy Production
If everyone agrees on PPF
then will focus on relative
benefits of the two goods.
Public choice to select which
of available points is preferred.
a
b
c
d
e
f
Energy Production
a
Environmental groups claim
severe cost and limited product.
Industry groups claim
low cost and abundant product.
Consensus solution less clear.
e
Energy Production
Fundamental Tradeoffs
and Economic Growth
(2) sources of economic growth
Questions for Our Tribe
Our standard of living appears to be
constrained by our production possibilities.
• can we expand our production possibilities?
• what choices make this possible?
Food
PPF defines limits of current consumption
b
a
Shelter
Economic Growth
Food
m
economic growth leads to
new possibilities
k
b
old limits
g
a
Shelter
Indicators of U.S. Economic Growth
Past
Present
Life Expectancy
40 years (1850)
77 years (2000)
Infant Mortality
15% (1850)
0.6% (2000)
Time at work to pay for a
dozen grocery items
9.5 hours (1919)
1.5 hours (2000)
Time at work to pay for a
refrigerator
1.5 years (1919)
2 weeks (2000)
economic growth around the world
(real gdp per capita, average annual growth)
1870
1950
1979
2008
1950-1979
1979-2008
US
$3,392
$13,266
$26,070
$43,250
2.3%
1.8%
Canada
$2,352
$10,116
$22,436
$35,058
2.8%
1.5%
Germany
& Japan
$1,787
$4,025
$18,840
$30,260
5.3%
1.6%
Soviet
Union
$1,308
$3,942
$8,980
$10,967
2.8%
0.7%
Mexico
& Brazil
$963
$2,801
$7,533
$9,996
3.4%
1.0%
China
& India
$738
$741
$1,342
$6,279
2.1%
5.6%
Africa
$694
$1,233
$2,069
$2,470
1.8%
0.6%
Questions for Our Tribe
Our standard of living appears to be
constrained by our production possibilities.
• can we expand our production possibilities?
• what choices make this possible?
Spring (salmon)
Fall (wildlife)
Forest
Winter
(shellfish & berries)
River
Stone Circles
Mountain
Summer (fish & roots)
Ocean
Shallow
Cove
Sources of Economic Growth
• find additional resources
– exploration & discovery
– tribe example? opportunity cost?
• create additional resources
– capital investment
– tribe example? opportunity cost?
(how about population growth?)
Sources of Economic Growth
• enhance productivity of current resources
human capital development
– tribe example? opportunity cost?
innovation, productive ideas
– tribe example? opportunity cost?
conservation of natural resources
(how about specialization and exchange?)
Sources of Economic Growth
• investment choices
– capital investment , human capital investment,
exploration & discovery, innovation, conservation
– all have current cost, future benefit
Sources of Economic Growth
Capital Goods
m
growth determined by current choices
k
b
g
a
Consumption Goods
Sources of Economic Growth
Capital Goods
m
k
current consumption
does not promote growth
b
old limits
g
a
Consumption Goods
Sources of Economic Growth
Capital Goods
m
current investment
does promote growth
k
b
old limits
g
a
Consumption Goods
Sources of Economic Growth
• investment choices
– capital investment , human capital investment,
exploration & discovery, innovation, conservation
– all have current cost, future benefit
– implications of diminishing returns
(growth limited when relying on one source alone)
– private (individuals, firms) or public
Sources of Economic Growth
Private
Public
Capital Investment
Manufacturing
Plant & Equipment
Transportation
Infrastructure
Human Capital
Choosing to attend
and complete college
Public support for
education and training
Discovery
Marine geology
Marine biology
Innovation
Intel microchip advances
Public support for
scientific research
Conservation
Thermostat setting
Building smart grid