Macro Chapter 2
Some Tools of the Economist
6 Learning Goals
1) Define and recognize examples of opportunity
costs (on your own; 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 (on your own)
What Shall We Give Up?
1) Define and recognize examples of
opportunity costs (on your own; repeat of
Chapter 1)
Trade Creates Value
Transmitter question next
Q2.1 When voluntary trade occurs, which
statement do you believe is most accurate?
1.
2.
3.
One person gains value while the other one loses
value
Both people gain some value
Neither people gain value
33%
33%
33%
60
1)
2)
3)
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
Video:
Demonstration:
Ten volunteers needed
Demonstration:
Start trading
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: How would a transaction
cost of $0.10 per trade impact the number
of trades? Provide an example of a
transaction cost you incurred lately.
Transmitter question next
Q2.2 Han Solo values his spaceship at $4,000,
and Lando Calrissian values it at $9,000. If Lando
buys it from Han for $7,000, which of the following
is true?
1. Han gains $3,000 of value, and Lando gains $2,000 of
value.
2. Han gains $7,000 of value, and Lando loses $7,000 of
value.
3. Han gains $7,000 of value, and Lando gains $6,000 of
value.
4. Han and Lando both gain $7,000 of value.
25%
25%
25%
25%
60
1
2
3
4
Video:
Supplemental reading “CBC-From paper
clip to house” (on Blackboard)
Supplemental video “20/20 One red
paperclip” (on Blackboard)
The Importance of
Property Rights
2 Kinds of Property Rights:
(1) Common rights – everybody (or a
large group) owns it
(2) Private rights – only one person (or a
small group) owns it
U.S. Constitution
Amendment IV
The right of the people to be secure in
their persons, houses, papers, and effects,
against unreasonable searches and
seizures, shall not be violated, and no
Warrants shall issue, but upon probable
cause, supported by Oath or affirmation,
and particularly describing the place to be
searched, and the persons or things to be
seized.
What’s your most important
property?
Property rights change the
incentives for individuals
Transmitter question next
Q2.3 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.
25%
25%
25%
25%
60
1)
2)
3)
4)
Property rights change the
incentives for individuals
Video:
Supplemental Video: Stossel- private
ownership and conservation (on
Blackboard)
Transmitter question next
Q2.4 In the city of Quahog, 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
Quahog, 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 Quahog
unless the government places the animals on the
endangered species list.
25%
25%
25%
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60
1
2
3
4
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
Violating property rights can
create undesirable behavior
Video:
Production Possibilities
Curve
Video:
PPC also called PP Frontier
Graph:
The PPC can shift
Graph:
The PPC can shift
Shift out: growth, produce more
Shift in: shrink, produce less
Transmitter question next
Q2.5 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.
an inward shift 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.
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25%
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60
1
2
3
4
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.
[you] could be a single person, a group of
people, a region, state, or country
Supplemental Video: Made in AmericaBarre granite (on Blackboard)
Transmitter Question Next
Q2.6 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.
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60
1
2
3
4
Importance of Comparative Advantage
Low opportunity cost
Comparative advantage
Specialization
Division of labor
Voluntary trade
Increased wealth
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
Transmitter Question Next
Q2.7 When voluntary trade occurs, which
statement is most accurate?
1.
2.
3.
One person gains value while the other one loses
value
Both people gain some value
Neither people gain value
33%
33%
33%
60
1
2
3
Economic Organization
List society’s three questions and specify
the kinds of economic organizations (on
your own)
Supplemental video: “Chapter 2-economic
organization” on Blackboard
6 Learning Goals
1) Define and recognize examples of opportunity
costs (on your own; 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 (on your own)