Economics 211 Principles of Microeconomics

1. Economics 211Principles of Microeconomics Dr. Greg Delemeester

2. Economics • Making choices under conditions of scarcity • How many hours should I study for biology? • What stocks should I buy for my portfolio? • How many cars should I steal? • How many job interviews should I go on?

3. What Do Schoolteachers and Sumo Wrestlers Have in Common? How Is the Ku Klux Klan Like a Group of Real-Estate Agents? Why Do Drug Dealers Still Live with Their Moms? Where Have All the Criminals Gone? What Makes a Perfect Parent? Would a Roshanda by Any Other Name Smell as Sweet? Increasing Residual Wage Inequality: Composition Effects, Noisy Data, or Rising Demand for Skill? Medium-Term Business Cycles Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle? Media Frenzies in Markets for Financial Information An Efficient Dynamic Auction for Heterogeneous Commodities Paying Not to Go to the Gym

5. Economic Fundamentals • Self Interest • Rationality • Maximizing behavior • Responding to incentives

7. Best Undergrad College Degrees by Salary Source: www.payscale.com

8. Mini Experiment • Incentives Matter! • “There are no $5 bills laying on the ground.”

9. Economic Fundamentals • Self Interest • Rationality • Maximizing behavior • Responding to incentives • TANSTAAFL • Scarcity  Opportunity costs There Ain’t No Such Thing As A Free Lunch

11. Economic Fundamentals • Self Interest • Rationality • Maximizing behavior • Responding to incentives • TANSTAAFL • Scarcity  Opportunity costs • Marginal Analysis • Behavior is modeled as if decisions were based on costs and benefits at the margin

12. Space Mountain (Problem Set 1, #9) You have waited 30 minutes in a line for the Space Mountain ride at Disneyworld. You see a sign that says, "From this point on your wait is 45 minutes." You must decide whether to continue in line or to move elsewhere. On what basis do you make the decision? Do the 30 minutes you've already stood in line come into play? Marginal Analysis ignores sunk costs!

13. William installs custom sound systems in cars. If he installs 7 per day, his total costs are $300. If he installs 8 per day, his total costs are $400. William will install only 8 sound systems per day if the 8th customer is willing to pay at least: • $50 • $120 • $300 • $400

14. “I’d like to introduce you to Marty Thorndecker. He’s an economist but he’s really very nice.” Greg Delemeester

15. Economic Fundamentals • Unintended Consequences • CAFE standards • 27.5 MPG fleet average • Lighter + smaller cars = more dangerous cars ? • National Academy of Sciences: 1300 to 2600 extra highway deaths each year • Modes of Analysis • Positive Analysis • Normative Analysis

17. 16.0 1980 14.0 1975 12.0 10.0 1970 Gun-Related Murders (Thousands) 8.0 Correlation is not causation. 1965 6.0 4.0 2.0 0.0 0.0 0.5 1.0 1.5 2.0 2.5 3.0 Guns Sold (Millions)

18. Economic Model of Crime • Decision Rule • If MB > MC  steal another car • Assumptions • Resale value on car = $40,000 • Income = $20,000 • Jail term = 5 years • Probability of Arrest = 20% • Probability of Conviction = 90% MB = $40,000 MC = (5)($20,000)(.20)(.90) = $18,000 Steal the car!

19. Economic Model of Crime • Policy Implications [How to deter crime?] • Increase jail sentence • Increase probability of arrest • Increase probability of conviction • Increase income

20. Which of the following will cause property crime to increase? • An increase in jail terms. • A decrease in personal incomes. • An increase in the probability of arrest. • A decrease in the expected benefit.

21. Applications (#3, Problem Set 1) • A few years ago, Tina ranked three available options as follows: • 1st Choice: pay $21,000 tuition and finish a Master's degree in fine arts at the Ohio State University. • 2nd Choice: earn $19,000 working part-time managing a small local theater and spend her spare time pursuing her theater hobby as a volunteer director of small-theater plays. • 3rd Choice: earn $44,000 working full-time reviewing yellow page advertisements for Ameritech.

22. What is the minimum value of Tina’s opportunity cost for pursuing her first choice? • $19,000 • $21,000 • $65,000 • $84,000 • 1st Choice: pay $21,000 tuition and finish a Master's degree in fine arts at the Ohio State University. • 2nd Choice: earn $19,000 working part-time managing a small local theater and spend her spare time pursuing her theater hobby as a volunteer director of small-theater plays. • 3rd Choice: earn $44,000 working full-time reviewing yellow page advertisements for Ameritech.

23. Production Possibilities Frontier • Shows tradeoffs facing an economy that produces two goods • Assumptions • Resources are fixed • Land • Labor • Capital • Entrepreneurship • Technology is fixed Cars E A Unattainable B D C Inefficient Beer

24. Assume a concave production possibility frontier. Suppose that the society decides to increase the production of beer by 20,000 kegs, and that as a result the output of cars falls by 1000. If a further increase of 20,000 kegs of beer is sought, we can expect that the output of cars will: • fall by 1000. • fall by less than 1000. • fall by more than 1000. • increase by less than 1000.

25. Concave PPF implies “law of increasing opportunity cost” Cars Δ Beer A B C - Δ Cars D Slope of PPF = - Δ Cars / Δ Beer (measures the Opportunity Cost) Beer

26. PPF and Economic Growth • Shifts in the PPF are due to: • Change in resources • Change in technology Economic Growth requires an expanding PPF

27. Production Possibilities Frontier • Examples • Cars v. Beer: more efficient brewing process • Houses v. Computers: immigration • Jazz v. Shrimp: Hurricane Katrina • Food v. Electronics: China’s Cultural Revolution

28. Consider the PPF depicted below. A reduction in the amount of unemployment could be described as the movement from: • A to B • B to D • D to C • B to E

29. Choices, choices, choices… • All societies must answer basic questions: • What will be produced? • How will it be produced? • For whom will it be produced? • Allocation Mechanisms • Tradition • Plan • Market

30. And now for a little humor…

31. Communism: You have two cows. The government takes both of them and gives you part of the milk.

32. Socialism: You have two cows. The government takes one and gives it to your neighbor.

33. Fascism: You have two cows. The government takes both cows and sells you the milk.

34. Nazism: You have two cows. The government takes both cows, then shoots you.

35. Bureaucracy: You have two cows. The government takes both of them, shoots one, milks the other, then pours the milk down the drain.

36. Capitalism: You have two cows. You sell one and buy a bull.

37. Gains From Trade • Trade implies mutually beneficial exchanges • Not a zero-sum game! • Comparative Advantage • David Ricardo • Lowest opportunity cost producer • Specialization and trade can allow individuals (and countries) to expand their consumption beyond their PPF constraints

38. Pizza Pizza slope = ∆P/ ∆ C = -300/25 = - 12/1 ∆C = 25 600 slope = ∆P/ ∆ C = -200/50 = - 4/1 ∆P = -300 ∆C = 50 400 ∆P = -200 300 200 50 100 Cars 25 50 Cars Country A Country B Opportunity cost of 1 Car is 4 Pizzas Opportunity cost of 1 Car is 12 Pizzas Country A has the comparative advantage in producing cars.

39. Pizza Pizza Country B Country A 600 400 300 200 50 100 Cars 25 50 Cars 200 50 0 100 Production 300 25 600 0 600 100 500 75

40. Assume that Robinson and Crusoe live on a desert island. With a day’s labor, Robinson can produce 6 fish or 4 coconuts; Crusoe can produce 3 fish or 1 coconut. Robinson’s opportunity cost of producing 1 coconut is ____, and he should specialize in the production of ____. • 1/4 fish; coconuts • 1.5 fish; coconuts • 3 fish; fish • 6 fish; coconuts

41. 20 21 10 11 12 14 15 16 2 3 25 0 35 12 37 14 Germany trades 3W for 9C ΔC = 9 ΔW = - 3 Germany Belgium Belgium: 1W : 5C Germany: 1W : 2C

42. Problem Set 1: #21 10 W 1/10 S 2 W 1/2 S US switches 1 hour of labor from steel to wheat SK switches 4 hours of labor from wheat to steel Trade: 50 W for 10 S +12 -24 -10 +50 +4 +10 +2 +26

43. Corner offices in high-rise office buildings usually cost more to rent than other offices. This best illustrates the economic principle of: • Scarce resources • Marginal analysis • Equilibrium • Opportunity costs

44. A friend comes up to you and offers to give you a free ticket to the local professional team's baseball game that night. You decide to attend the game. It takes five hours to go to the game and costs you $15 for transportation. If you had not attended the game, you would have worked at your part-time job for $8 an hour. What is the cost of you attending the game? • Zero—the ticket is free. • $15 • $55 • $40

45. In the accompanying figure, Tealand is currently producing at point C on its production possibilities frontier. What is the opportunity cost in Tealand of increasing the production of tea from 20 million cups to 30 million cups? • 10 million cups of tea • 5 million scones • 10 million scones • The answer is impossible to determine from the information given.

46. Which of the following is a normative statement? • International trade will increase the average income of Americans. • Higher expenditures on health care will reduce infant mortality rates. • We ought to reduce our dependence on oil imports in order to increase our national security. • Increased defense spending will lead to higher budget deficits.

47. While eating pizza, you discover that the marginal benefit of eating one more slice is greater than the marginal cost of that slice. You then conclude: • you will be better off if you eat one more slice. • the total cost of eating the pizza will be more than the total benefit of eating the pizza. • you will be worse off if you eat one more slice. • you will be no better off and no worse off from eating one more slice.  

48. Which of the graphs below shows the impact of scientists developing a more powerful fertilizer? • Figure A • Figure B • Figure C • Figure D

49. If they spend all night writing computer programs, Derek can write 10 programs while Tian can write 5. If they spend all night making sunglasses, Derek can make 6 while Tian can make 4. From this information we know that: • Tian’s opportunity cost of writing programs is less than that of Derek. • Derek’s opportunity cost of writing programs and of making sunglasses is less than that of Tian. • Tian’s opportunity cost of writing programs and of making sunglasses is less than that of Derek. • Derek’s opportunity cost of writing programs is less than that of Tian.

50. Problem Set 1: #14 Sue Student Cost of going to college = $17,000 + $600 + $19,000 = $36,600