Assignment
– Find an article that is related to chapters 1 and 2
– Write half-page summarizing the article
– Write another half page on how your article is related to the chapter and your personal opinion on the topic being discussed in the article
*Chapters are attached*
The Economic Approach
GWARTNEY – STROUP – SOBEL – MACPHERSON
To Accompany: “Economics: Private and Public Choice,
15th
ed.”
James Gwartney, Richard Stroup, Russell Sobel, & David Macpherson
Slides authored and animated by: James Gwartney & Charles Skipton
Full Length Text —
Micro Only Text —
Part: 1
Part: 1
Chapter: 1
Chapter: 1
Macro Only Text —
Part: 1
Chapter: 1
Copyright ©2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.
First
page
What is Economics About?
15th
edition
Gwartney-Stroup
Sobel-Macpherson
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First
page
Scarcity and Choice
Scarcity and choice are the two essential ingredients
of an economic topic.
Goods are scarce because desire for them far outstrips their availability from nature.
Scarcity forces us to choose among available alternatives.
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History is a record of our struggle to transform available, but limited, resources …
Scarce Goods
Food (bread, milk, meat, eggs,
vegetables, coffee, etc.)
Clothing (shirts, pants, blouses, shoes,
socks, coats, sweaters, etc.)
Household (tables, chairs, rugs, beds,
goods dressers, television sets, etc.)
Education
National defense
Leisure time
Entertainment
Clean air
Pleasant (trees, lakes, rivers,
environment open spaces, etc.)
Pleasant working conditions
Limited Resources
Land (various degrees of fertility)
Natural (rivers, trees, minerals,
Resources oceans, etc.)
Machines and other
human-made physical resources
Non-human animal resources
Technology (physical and scientific
“recipes” of history)
Human (the knowledge, skill,
resources and talent of individuals)
into scarce goods – things that we would like to have.
Scarcity and Choice
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Sobel-Macpherson
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Scarcity and poverty are not the same thing.
The absence of poverty implies some basic level
of need has been met.
An absence of scarcity would imply that all of our
desires for goods are fully satisfied.
We may someday eliminate poverty, but scarcity
will always be with us.
Scarcity and Choice
15th
edition
Gwartney-Stroup
Sobel-Macpherson
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First
page
Scarcity Necessitates Rationing
Every society must have a means to ration scarce resources among competing uses.
Resources and goods can be rationed in various ways
(e.g. first-come, first served).
In a market setting, price is used to ration goods
and resources.
When price is used, the good or resource is allocated to those willing to give up “other things” in order to obtain ownership rights.
When price is used to ration goods, people have a strong incentive to earn income so they will be able
to pay the required price.
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Sobel-Macpherson
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Competition Results from Scarcity
Competition is a natural outgrowth of the need to ration scarce goods.
Changing the rationing method used by society will change the form of competition, but it will not eliminate competitive tactics.
15th
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Sobel-Macpherson
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First
page
Questions for Thought:
1. How are grades rationed in your economics class?
How does this rationing method influence student behavior? Suppose the highest grades were rationed
to those who the teacher liked best. How would this method of rationing influence student behavior?
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First
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The Economic Way of Thinking
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Sobel-Macpherson
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Guideposts to Economic Thinking
The use of scarce resources to produce a good or service
is always costly.
Someone must give up something if we are to have more of a scarce good.
The highest valued alternative that must be sacrificed is the opportunity cost of the choice.
Individuals choose purposefully; therefore they will economize.
Economizing:
gaining a specific benefit at the least possible cost.
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Guideposts to Economic Thinking
Incentives matter:
As personal benefits (costs) from choosing an option increase, other things constant, a person will be more (less) likely to choose that option.
Economic reasoning focuses on the impact of marginal changes.
Decisions will be based on marginal costs and marginal benefits (utility).
Since information is scarce, uncertainty is a fact of life.
In addition to their initial impact, economic events often generate secondary effects that may be felt only with the passage of time.
15th
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Sobel-Macpherson
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Guideposts to Economic Thinking
The value of a good is subjective and varies with individual preferences.
The test of an economic theory is its ability to predict
and explain events in the real world.
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Questions for Thought:
1. In an effort to promote energy conservation, Congress mandates a minimum average gas mileage that car producers must achieve for the cars that they sell. Can you think of any secondary effects of these mandates that will conflict with energy conservation? With auto safety?
2. “The government should provide goods such as health care, education, and highways because it can provide them free.” — Is this true or false?
3. Would sound policy attempt to reduce pollution emissions to zero? Why or why not.
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page
Positive &
Normative Economics
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Sobel-Macpherson
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Positive Economics
Positive Economics:
The scientific study of “what is” among economic relationships.
Positive economic statements involve potentially verifiable statements.
Example:
The inflation rate rises when the money supply
is increased.
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Normative Economics
Normative Economics:
Judgments about “what ought to be” in economic matters.
Normative statements reflect subjective values.
They cannot be proved true or false.
Example:
The inflation rate should be lower.
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page
Pitfalls to Avoid in
Economic Thinking
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Four Pitfalls
Violation of the ceteris paribus condition
Latin term meaning “other things constant.”
When describing the effect of a change, the outcome
may be influenced by changes in other things.
Good intentions do not guarantee desirable outcomes.
An unsound proposal will lead to undesirable outcomes even if it is supported by proponents with good intentions.
Politicians may be able to gain by focusing attention on a problem even if their policy response is ineffective or even harmful.
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Four Pitfalls
Fallacy of composition
The erroneous view that what is true for the individual (or the part) is also true for the group
(or the whole).
Microeconomics focuses on narrowly defined units, while macroeconomics is focused on highly aggregated units.
One must beware of the fallacy of composition when shifting from micro- to macro-units.
Association is not causation.
Statistical association alone cannot establish causation.
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First
page
Questions for Thought:
1. Which of the following are positive economic statements and which are normative?
(a) The speed limit should be lowered to 55 miles per hour on interstate highways to reduce the number of deaths and accidents.
(b) Higher gasoline prices cause the quantity of gasoline that consumers buy to increase.
(c) A comparison of costs and benefits should not be used to assess environmental regulations.
(d) Taxes on alcohol result in less drinking and driving.
15th
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First
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Questions for Thought:
2. “Economist, n. – A scoundrel whose faulty vision sees things as they really are, not as they ought to be.”
(chapter-opening quote)
What is the underlying message of this definition from Ambrose Bierce? Does it indicate that economists think with their heads or their hearts? Is this good or bad?
3. Suppose you were spending your own money to buy a new entertainment center (TV, DVD player, etc) for your apartment. Would you have an incentive to economize?
Suppose your parents had given you permission to buy whichever entertainment center you wanted with their money. Would that influence what you buy?
Why or why not?
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First
page
End of
Chapter 1
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First
page
S
ome
T
ools of the Economist
GW
A
RTNEY – STROUP – SO
B
EL – MA
C
PHERSON
To Accompany: “Economics: Private and Public Choice,
15th
ed.”
James Gwartney, Richard Stroup, Russell Sobel, &
D
avid Macpherson
Slides authored and animated by: James Gwartney & Charles Skipton
F
ull Length Text —
Micro Only Text —
Part: 1
Part: 1
Chapter: 2
Chapter: 2
Macro Only Text —
Part: 1
Chapter: 2
Copyright ©2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.
First
page
What Shall We Give Up?
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First
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Opportunity Cost
Opportunity cost:
The highest valued activity sacrificed in making a choice.
Opportunity costs are incurred when a choice is made.
They are subjective and vary across persons.
If an option becomes more costly, an individual will be
less likely to choose it.
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Opportunity Cost
All choices involve costs.
Consider the costs of going to college.
The opportunity cost of going to college includes:
Monetary cost: tuition, books.
Non-monetary cost: forgone earnings.
If the opportunity cost of college rises (e.g. tuition rises or you get a fantastic job offer) then one will
be less likely to attend college.
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First
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Trade Creates Value
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Trade and Transactions Costs
Mutual gain is the foundation of trade.
Value can be created by exchanges that move goods
to individuals who value them more.
Transactions costs:
the time, effort, and other resources needed to search out, negotiate, and consummate an exchange.
Transactions costs reduce our ability to produce gains
from potential trades.
How does the Internet reduce transactions costs and
thereby enhance trade?
Examples: eBay, iTunes, Amazon.com.
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Trade and the Middleman
Middleman:
A person who buys and sells, or arranges trades.
Middlemen reduce transactions costs.
Example:
your local grocer reduces the transactions costs of your acquiring vegetables from farmers, milk from diaries, and other products from food manufacturers.
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Questions for Thought:
It takes 1 hr. to travel from New York to D.C. by air, but
it takes 5 hrs. by bus. If the air fare is $110 and the bus fare is $70, which is cheaper for someone whose opportunity cost of travel time is $6 per hour? How about for someone whose opportunity cost is $10 per hour? $14 per hour?
Consider the choices of women aged 30 to 50 years old with (a) a college education or (b) less than a high school education. In which case will the share of women in the work force be highest? Which will have the higher average number of children? Why?
15th
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Questions for Thought:
3. Why do people engage in exchange? Why do you trade for so many goods instead of just producing them yourself?
4. In many states, the resale of tickets to sporting events at prices above the original purchase price (“ticket scalping”) is prohibited. Is this a good idea? Who is hurt and who is helped by this prohibition?
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The Importance of Property Rights
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Private Property Rights
Property rights:
The right to use, control, and obtain benefits from
a resource, good, or service.
Private property rights involve:
the right to exclusive use.
legal protection against invaders.
the right to transfer to another.
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Private Property and Incentives
Private ownership is a key to prosperity as it provides people with a strong incentive to take care of things and develop resources in ways that are valued by others.
Private owners can gain by using their resources in ways beneficial to others.
They have a strong incentive to care for and manage what they own.
They have an incentive to conserve for the future (especially if the property’s value is expected to rise).
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Private Property and Incentives
Private ownership is a key to prosperity as it provides people with a strong incentive to take care of things and develop resources in ways that are valued by others.
(continued…)
With private property rights, owners are liable if
their property is used in a manner that damages
the property of others.
Private ownership links responsibility with the
right of control.
In contrast, commonly owned property will be poorly maintained and over-utilized rather than conserved for future use.
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Sobel-Macpherson
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Private Property and Markets
When private property rights are protected and enforced, permission of the owner is required for use of a resource.
If you want to use a good or resource, you must either buy or lease it from the owner.
Individuals and firms are faced with the cost of using
scarce resources.
Market prices provide a strong incentive for private owners to consider the desires of others and to use and develop resources that are highly valued by others.
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Questions for Thought:
1. (a) Can private owners do anything they want with the things that they own?
(b) Why is private ownership important?
(c) Do the owners of land and buildings near your campus have an incentive to use those assets to provide things that students value highly? Why or why not?
2. Does a 60 year old tree farmer have an incentive to plant and care for Douglas fir trees that will not reach optimal cutting size for 50 years? Explain.
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Sobel-Macpherson
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Questions for Thought:
3. Selling your organs is a violation of federal law, a felony punishable by up to five years in prison or a $50,000 fine. A few years ago, eBay intervened when a person put one of his kidneys up for sale on eBay (the bidding reached $5.7 million before it was pulled).
If you were largely incapacitated because of failure of you kidneys, how much would you be willing to pay to receive a healthy kidney? Is the United States a better place to live because such transactions are prohibited?
Note: people are born with 2 kidneys and can live a perfectly normal life with only one kidney.
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The Production Possibilities Curve
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Production Possibilities Curve
for Susan’s grades in English and Economics with 10 hours of study
Susan is a student who only has 10 hours of study to divide between her economics and English classes.
If she spends most of her time studying economics, she can earn an A in econ …
If she splits her time between the two, she can earn a B in economics…
If she spends most of her time studying English, she can earn a D in economics …
Mapping out all the ways Susan can divide her time (limited resources) between these activities shows us her Production Possibilities Curve ( PPC ).
A
A
B
B
C
C
D
D
Expected
grade in
Economics 101
Expected
grade in
English 101
F
F
Production Possibilities
Curve (PPC)
and a D in her English class.
and
a B in English.
and an A in English.
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Production Possibilities Curve
for a nation’s economy (given limited resources)
Consider an economy which has limited resources to divide between
the production of clothing and food.
If it allocates all of its resources toward the production of clothing, then it can produce at point S.
– Inefficiency –
Output
of clothing
Output
of food
A
D
B
C
T
S
Production Possibilities
Curve (PPC)
Only clothing
is produced
Only food
is produced
All output
combinations
on the frontier
curve are
efficient.
Mapping all the possibilities gives the their Production Possibilities Curve.
Output combinations A, B, & C are all on the PPC and are, therefore, efficient allocations of resources.
D is within the PPC and represents an inefficient resource allocation (as B delivers more food w/ the same clothing).
If it allocates all of its resources toward the production of food, then it can produce at point T.
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19
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Shifting the Production
Possibilities Curve Outward
An increase in the economy’s resource base would expand our ability to produce goods and services.
Advancements in technology can expand the economy’s production possibilities.
An improvement in the rules (laws, institutions, and policies) of the economy can increase output.
By working harder and giving up current leisure, we could also increase our production of goods and services.
This requires us to give up something we value: leisure.
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Investment and Production
Possibilities in the Future
The long-term benefits of investment include greater future output. Thus, decisions we make today regarding how much to save (investment) and consume determine the shape of the PPC 10 years from now.
If we choose to produce a mixture
of consumption and investment goods which corresponds to bundle A …
then the future PPC might move out
to PPC 2024 with A – due to the new buildings, equipment, training, and other forms of investment goods that
IA
represents.
Investment
goods
Consumption
goods
IA
CA
A
PPC 2014
PPC 2024 with A
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Investment and Production
Possibilities in the Future
If we choose to produce a mixture of consumption and investment goods which corresponds to bundle B, with fewer consumption goods (
CB
< CA) and more investment (
IB
> IA) … then the future PPC might move out to PPC 2024with B instead.
The level of investment (savings) in an economy is only one determinant of the movement outward (or inward) of the production possibilities curve.
Investment
goods
Consumption
goods
IA
CA
A
PPC 2024 with A
PPC 2024 with B
B
IB
CB
PPC 2014
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Trade, Output, and Living Standards
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Division of Labor
The division of labor:
breaks down the production of a good into a series
of tasks performed by different workers.
Specialization and the division of labor increase output for three reasons:
Specialization permits individuals to take advantage
of their existing skills.
Specialized workers become more skilled with time.
Division of labor allows for the adoption of mass-production technology.
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Law of Comparative Advantage
Law of comparative advantage:
The proposition that the joint output of trading partners will be greatest when each good is produced by the low opportunity cost producer.
Implies that trading partners can gain by specializing in the production of goods they can produce at a relatively low opportunity cost and trade for goods they could only produce at a relatively high opportunity cost.
The principle of comparative advantage is universal as it applies across individuals, firms, regions and countries.
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Sources of Gains from Trade
Trade is a key to prosperity because it:
channels goods toward those who value them the most, and,
makes it possible for people to produce more as the result of specialization & division of labor, large-scale production processes, and the dissemination of improved products and lower cost production methods.
Economies of Scale: oftentimes large scale production leads to lower per unit costs.
Innovation: technological change is about figuring out how to get more from existing resources.
Gains from trade underlie modern living standards.
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Human Ingenuity
and
the Creation of Wealth
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Human Ingenuity
Is the size of the “economic pie” fixed or variable?
At any point in time, an economy’s output is limited
by it’s resource base. The production possibilities curve highlights this point.
Over time, investment and improvements in technology permit us to increase output. Shifts in the production possibilities curve highlight this point.
Economic goods are the result of human ingenuity and action. Through time, the size of the “economic pie” is variable, not fixed.
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Economic Organization
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The Three Basic Questions
Faced by All Economies
The three basic questions faced by all economies are:
What goods will be produced?
How will goods be produced?
For whom will goods be produced?
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Sobel-Macpherson
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Market Organization
Market organization:
A method of organization that allows for unregulated prices and the decentralized decisions of private property owners to resolve the basic economic problems.
Sometimes called capitalism.
15th
edition
Gwartney-Stroup
Sobel-Macpherson
Copyright ©2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.
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Political Planning
Political organization is the major alternative to the
use of markets.
Political organization involves the use of collective decision making (government) to decide what, how,
and for whom goods and services will be produced.
An economic system in which the government owns the income-producing assets and directly determines what goods they produce is called socialism.
In a democracy, political decision makers have to consider how their actions will influence their election prospects.
15th
edition
Gwartney-Stroup
Sobel-Macpherson
Copyright ©2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.
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Questions for Thought:
1. Suppose Amy is a doctor who has records that need to be entered. Doing the work herself would take 10 hours per week. She is thinking about hiring an assistant who could do the work in 40 hours per week. If Amy can make $80 per hour seeing patients, should she hire the assistant at $10 an hour to enter her records?
2. Do you make the food that you consume and clothing you wear? Would you be better off if you did not buy so many things from others? Would modern living standards be possible without trade? Would Americans be better off if they did not buy so many things from foreign producers?
15th
edition
Gwartney-Stroup
Sobel-Macpherson
Copyright ©2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.
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Questions for Thought:
3. What does a production-possibilities curve demonstrate? Can an economy’s production possibilities be increased?
If so, how?
4. What is the law of comparative advantage? Do people have an incentive to trade for things they can produce only at a high cost? Explain.
5. “Modern living standards are primarily the result of brain power, capital formation, & the quality of institutions.”
What is the meaning of this statement? Is it true?
15th
edition
Gwartney-Stroup
Sobel-Macpherson
Copyright ©2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.
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End of
Chapter 2
Copyright ©2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.
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