Leah Marcal
● Education:
♦ B.A. in Economics –UCSC
♦ M.S. and PhD in Economics –UW Madison
● Background:
♦ Bass Lake
● Teaching Experience:
♦ ECON 160, 310, and 406 & BUS 302
Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
Leah Marcal (cont.)
● Research:
♦ College Assessment Director
■Employer, alumni, and student satisfaction surveys
■Returns to college education
● Interests:
♦ Hiking
♦ Texas Hold’em
Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
Your Introductions:
● Name
● Major
● Employment
● Favorite movie
Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
Syllabus
● Preparation:
♦ Strong working knowledge of high school
algebra and geometry
● Textbook:
♦ Baumol and Blinder, Microeconomics:
Principles and Policy, 11th edition (2009)
Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
Syllabus (cont.)
● Review:
♦ Class website:
http://www.csun.edu/~lem50734/
■PPT slides for each lecture
■Answers to selected questions at the end of each
chapter
■Online practice quizzes
Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
Syllabus (cont.)
● Assessment:
♦ In-class quizzes (10%)
■Drop lowest score
♦ Midterm (40%)
♦ Final (50%)
■Contain T/F, multiple choice, and essay questions
■No make-up quizzes or exams
Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
Syllabus (cont.)
● Office Hours:
♦ JH 4250 on Tues. and Wed. 4:30 to 5:30; or by
appointment
♦ Email your questions: leah.marcal@csun.edu
● Classes:
♦ 13 meetings: 11 lectures and 2 exams
♦ 1 chapter covered per day
Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
Date
Topic
Chapter
01/04
Scarcity and Cost
3
01/05
01/06
01/07
01/08
01/09
01/11
01/12
01/13
01/14
01/15
01/16
01/17
Supply and Demand
Consumer Choice and Market Demand
Demand and Elasticity
Production and Cost
Output, Price, and Profit
Midterm Exam
Perfect Competition
Monopoly
Between Competition and Monopoly
Price System and Free Markets
International Trade
Final Exam
4
5
6
7
8
--10
11
12
14
22
---
1
The Fundamental
Economic Problem:
Scarcity and Choice
Scarcity and Choice
● Central problem in economics: how to chose
among competing alternatives given the limited
resources of decision makers
Decision-maker
CA state gov.
Fed gov.
Households
Firms
Alternatives
Roads or schools
Defense or SSI
New car or trip
PCs or office furniture
Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
Scarcity and Choice
● All resources are scarce, so a decision to
have more of one thing is a decision to have
less of something else.
● Cost of any decision is its opportunity cost –
value of the next best alternative that is
given up.
● What is the cost of producing one car?
Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
Scarcity and Choice
● Goods are scarce because the resources
(land, labor, capital, and fuel) that are used
to produce goods are scarce.
● How does society decide whether cars or
refrigerators are produced?
♦ Forces of S and D
Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
Opportunity Cost and Money
Cost
● Opportunity cost is closely related to money
cost if markets function properly
♦ E.g., D for steel → high P for steel → high
opportunity cost of car → high P for cars
● No explicit P for some valuable resources –
like time
● TC = money cost + opportunity cost
♦ E.g., college education
Copyright© 2006 South-Western/Thomson Learning. All rights reserved.
Scarcity and Choice for a
Single Firm
● Production Possibilities Frontier
♦ PPF = graph showing different combinations
of output for a fixed number of inputs
♦ More of one good  less of another
♦ Illustrates opportunity costs in production
Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
TABLE
1. PPF for a Farmer
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Soybeans
FIGURE
40
30
20
1. PPF for a Farmer
A
B
Attainable
region
Unattainable
region
C
D
10
0
10
20
30 38
Wheat
E
52 60 65
Copyright© 2006 South-Western/Thomson Learning. All rights reserved.
Features of the PPF
●
Negatively sloped
♦
●
●
↑ Q wheat by moving resources out of soybean
production and into wheat production
Slope = opportunity cost
Bowed outward
♦
↑ Opportunity cost of wheat as ↑ wheat production
■
Why? Inputs tend to be specialized. E.g., some land may
be better suited for wheat vs. soybean production.
Copyright
Copyright©
© 2006 South-Western/Thomson Learning. All rights reserved.
Principle of Increasing Costs
♦ Principle of increasing costs:
 production of one good 
 opportunity cost of producing another unit
♦ PPF is bowed outward
♦ Reason: inputs tend to be specialized
■If not, then PPF is a straight line
Copyright© 2006 South-Western/Thomson Learning. All rights reserved.
FIGURE 2. PPF without Specialized
Resources
50
Black Shoes
40
A
B
30
C
20
D
10
0
10
20
30
40
50
Brown Shoes
Copyright© 2006 South-Western/Thomson Learning. All rights reserved.
Principle of Increasing Costs
● Straight line PPF:
♦ Constant opportunity costs
♦ Inputs are not specialized
■Above, inputs used to produce black shoes are
equally well suited to produce brown shoes
Copyright© 2006 South-Western/Thomson Learning. All rights reserved.
Scarcity and Choice for the
Entire Society
● Use PPFs to show scarcity and choice for the
entire economy
● PPF for a country depends on:
♦ Resources
♦ Skills of its labor force
♦ Technology
♦ Willingness to work
♦ Past investments in factories, educ., and research
Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
FIGURE 3. PPF for Entire Economy
700
Thousands of Automobiles per Year
B
600
D
500
E
400
300
F
200
100
C
0
100
200
300
400
500
Missiles per Year
Copyright© 2006 South-Western/Thomson Learning. All rights reserved.
Scarcity and Choice for the
Entire Society
● B → D: give up 150,000 cars to get 300
missiles.
● F → C: give up 200,000 cars to get 50
missiles.
● ↑ Opportunity cost of military strength as
more resources that are suited for car prod.
are forced into missile prod.
Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
Economic Growth
● ↑resources or technology shifts the PPF outward
● Factors that promote growth:
♦ ↑ labor skills
♦ Technological advances
♦ Investments in K –robots, computers, and factories
● Grow faster by investing in educ., R&D, and new
factories and equipment
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Economic Growth
● Resources can be used to produce C goods
or K goods
♦ E.g., steel used to produce cars instead of
assembly lines; workers used to produce
clothing instead of attending school.
● Investment in K goods shifts out the PPF
● What is the cost of economic growth?
Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
Figure 4. Growth in the U.S. and Asia
G
Next year’s
production
possibilities
N
Consumption Goods
A
This year’s
production
possibilities
g
Consumption Goods
F
Next year’s
production
possibilities
This year’s
production
possibilities
f
B
F
G
Capital Goods
(a) United States
f
g
Capital Goods
(b) Asia
Copyright© 2006 South-Western/Thomson Learning. All rights reserved.
Efficiency
● Efficiency = no waste
● Economy produces max. output using
available resources
● Efficiency and the PPF
♦ Any point on the boundary is efficient
■Efficiency does not indicate which point is best
♦ Any point on the interior is inefficient
Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
FIGURE 5. PPF and Efficiency
Point A is inefficient
700
Thousands of Automobiles per Year
B
600
D
500
A
400
E
300
F
200
100
C
0
100
200
300
400
500
Missiles per Year
Copyright© 2006 South-Western/Thomson Learning. All rights reserved.
Efficiency
● Sources of inefficiency:
♦ Unemployment
♦ Inputs assigned to the wrong task
♦ Discrimination
Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
Three Coordination Tasks of
Any Economy
1. How to utilize resources efficiently –get
on the boundary of the PPF
2. What combinations of goods to produce –
which point on the PPF
3. How much of each good to distribute to
each person –who gets what
♦
Goals can be accomplished by a central planner or a
price system
Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
Efficiency in Production
● Division of Labor: each person specializes in the
production of a particular good or task
● Adam Smith in Wealth of Nations (1776)
describes specialization in a pin factory:
♦ “One man draws out the wire, another straightens it, a
third cuts it, a fourth points it, a fifth grinds it at the
top for receiving the head; to make the head requires 2
or 3 distinct operations; to whiten the pins is another;
it is even a trade by itself to put them into the paper.”
Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
Efficiency in Production
● Smith observed that this division of labor
increased the productivity of the workers as
a whole stating:
■“I have seen a manufacturing plant where 10 men
were employed. Those 10 men could make among
them upwards of 48,000 pins a day. But if they had
all worked separately and independently, they
certainly could not each of them have made 20,
perhaps not 1 pin in a day.”
Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
Efficiency in Production
● Imagine a world without specialization
♦ You would have to produce all of your own
clothing, food, shelter, and transportation.
● So what should you specialize in?
■Doing what you do best and trading with others
Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
Efficiency in Production
● Example: a world-class neurosurgeon is the
best car mechanic in Los Angeles.
♦ Should she repair her own car?
♦ What is the opportunity cost of having her
spend one hour repairing her car?
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Comparative Advantage
● Principle of comparative advantage is illustrated
here.
● Neurosurgeon specializes in surgery despite her
advantage as a car mechanic because she has an
even greater advantage as a surgeon.
● She suffers some loss by letting a lesser skilled
mechanic repair her car. Yet, she makes up for
that loss by the income gained from surgery.
Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
Comparative Advantage
● Comparative advantage applies to countries.
● Standard of living in the U.S. would be
lower if it tried to produce everything itself.
♦ Example: U.S. could produce winter roses and
computer software.
♦ U.S. is better off specializing in software and
buying winter roses from Latin America where
the opportunity cost of roses is lower.
Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
Voluntary Exchange
● Specialization leads to exchange
♦ Prior to industrial revolution, workers produced what
they consumed. After, workers who produced shoes
needed to trade with others who produced food or
clothing.
● Voluntary exchange between 2 parties must make
both parties better off.
♦ Even though no additional goods are created in the act
of trading, welfare of society is improved. Individuals
can trade what they have for what they want.
Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
Voluntary Exchange
● Why don’t we trade goods for goods? Why do
we need money?
■ Search costs
● Recall: focus is efficiency in production.
Sidetracked: division of labor and specialization
→ comparative advantage → exchange
● Firms are also encouraged by the profit motive
not to waste inputs → efficiency in production
Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
Production Decisions
● Task (2) –which point on the PPF –is
accomplished by the forces of S and D.
♦ Example: if consumers want more fuelefficient cars, automakers must produce
smaller, more efficient cars.
Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
Distribution of Goods
● Task (3) –who gets what –is accomplished by
consumers purchasing what they like best given
their income.
● Ability to purchase goods is not equally
distributed.
♦ Highly skilled workers and individuals who own
valuable resources can sell their labor or resources at
high prices giving them greater incomes.
● Should we redistribute income so that everyone
can consume the same amount of goods and
services?
Copyright © 2006 South-Western/Thomson Learning. All rights reserved.