CIS Microeconomics Exam One Review

What is Economics?
Economics is the battle between limited resources and unlimited wants. Five Goals of an Economic System: Growth Full Employment Price Stability Economic Freedom Fair Distribution of Wealth Nine Big Ideas: Idea 1: How much does it really cost? Opportunity Costs: The true costs of decisions are not the number of dollars spent, but the value of what must be given up in order to acquire the item. These decisions represent the opportunities the individual, firm, or government must forgo to make the desired expenditure. Rational decision making is based on this. Ex. Going to college vs. skipping college and begin working. Idea 2: Attempts to Repeal the Laws of Supply and DemandThe Market Strikes Back When something is in short supply, the price usually goes up. When something has an abundant supply, prices usually reduce. Falling prices make producers unhappy and often pursue legislation to impose price floors. However, price floors on certain objects, such as agriculture, are not helpful because it usually causes a surplus in a particular item. Idea 3: The Surprise Principle of Comparative Advantage Law of Comparative Advantage: States that even in extreme cases in international trade, two nations can still benefit by trading and each can still gain as a result. Ex. If one country is more efficient in everything, both countries can gain by producing the things they do best comparatively. Idea 4: Trade is a Win-Win Situation We use our resources efficiently Costs are cheaper Both parties must expect to gain something in a voluntary exchange. - Ticket Scalping - Minimum wages Idea 5: The Importance of Thinking at the Margin Ex. Outsourcing manufacturing to reduce labor costs or hiring illegal immigrants to reduce costs Idea 6: Externalities: A Shortcoming of the Market Cured by Market Methods Externalities: Social costs that affect parties external to the economic transactions that cause them. Markets are adept to producing goods that consumers want in the correct quantities they desire by rewarding those who respond to what consumers want and who produce these products economically. The market flushes out waste and inefficiency by seeing to it that inefficient producers lose money. This only works as long as each exchange only involves the buyer and the seller and no one else. Idea 7: Why the Costs of Education and Medical Care Keep Growing The growth in technology causes workers to be more productive at their jobs. Therefore, wages for employees also rise to avoid the risk of employees leaving their jobs for higher paying ones. When wages rise, the cost of these services goes up. This phenomenon is called cost disease. Ex. Teachers are a cost disease because they require an increase in pay to continue teaching.

Idea 8: The Trade-Off Between Efficiency and Equality The American solution to deal with unemployment and low wages is to let markets work to promoted efficiency with minimal government interferences to reduce economic inequalities. In Europe, they promote high minimum wages and substantial benefits to their employees. However, their taxes are higher than the U.S. and they have a higher unemployment rate than the U.S. Idea 9: Productivity Growth is (Almost) Everything in the Long Run Productivity is referred to as the outputs per hour of work of a certain material/thing Productivity has increased by about seven times in the past 100 years

International Trade & Statistics / Closed vs. Open Economics:

Open Economy: Exports and imports constitute a large share of its GDP. Usually countries who do not have many of the factors of production Ex. Netherlands is an open economy with about 56% of the economy being open Closed Economy: A country that does not trade with other nations in goods or assets Have the available resources to keep goods that are produced by country GDP does not rely on imports and exports US is a relatively closed economy because only 13% are imports. US mainly imports oil and manufactured goods from other countries. US is also closed because we have a large population. International Trade United States is the most productive because we have a high population of working people. US becomes wealthy because we are productive in our services Japan is close but they are not as efficient as the US Germany & Switzerland are rich countries but have low populations India & China have large populations but are not efficient

Factors of Production:
Factors of Production: Resources that are used to produce goods and services Land: The things created by the acts of nature such as land, water, mineral oil, gas deposits, renewable and nonrenewable resources. Ex. MN has coal, fresh water, timber, and wood Labor: The human effort, physical and mental, used by workers in the production of goods and services. White collar mental worker Blue/Brown collar manual labor (immigrants) Capital: Physical Capital: All the machines, buildings, equipment, roads, and other objects made by human beings, to produce and distribute goods. Ex. Airports, highways, schools Human Capital: The knowledge and skills acquired by a worker through education and experience Technology: Technology: The effort to coordinate the production and sale of goods/services.

Capital Goods vs. Consumption Goods:

Capital Goods: Used for the production of future goods. Investing in infrastructure, education, and transportation Gives up luxuries now to experience them later Ex. China has an advanced highway and transportation system after investing heavily in their infrastructure for many years Consumption Goods: Things you buy right now to consume in the present. Sacrifice less now Opportunity cost for US is that we are 10 years behind China in infrastructure and public transportation

Production Possibility Frontier (PPF):

Unattainable Region

Inefficient

Attainable Region

Efficient

PPF shows different combos of output for a specified amount of inputs More of 1 good = less of another Opportunity costs can be calculated using PPF Slope = opportunity cost

The Principles of Increasing Cost: Shape: Concave Increased production of 1 good = decreased opportunity cost of producing additional units Reason: Inputs tend to be specialized. Switching production can results in inefficiencies. Expensive, new labor to train, etc. Ex. Making shoes to making clothes The Concept of Efficiency: Efficiency = No Waste All available resources are utilized Inefficiency is caused by: Assigning inputs to the wrong task Unemployment Discrimination Competition usually eliminates inefficiency Scarcity doesnt let us reach unattainable level How to Attain Unattainable Points on PPF: Advances in technology Invest in future with capital goods infrastructure, energy, public transportation, and factors of production Ex. China and advanced highways and transportation Discover additional natural resources Increase in population Investment in capital Improved education and training human capital Trading with other countries Gross Domestic Product (GDP): Nominal GDP: Measured without the rate of inflation. Used by politicians Real GDP: Measures GDP with inflation

Absolute vs. Comparative Advantage:

Absolute Advantage: Who can produce the MOST with the same given resources Comparative Advantage: Who can produce a good with the LEAST opportunity cost Benefits of Trade/Comparative Advantage - Specialization Better quality More efficient Increased number of customers/ Profit - More goods and services for both parties (more choices for consumers) - Higher standard of living How to Find Comparative Advantage: Whatever you are comparing goes on the bottom (denominator) and the thing you are comparing it to goes on top (numerator). The answer equals how much of the other product you are losing. Whichever person loses LESS has the comparative advantage: See example below:

Ex. John and Jane are on the yearbook committee and they have to take pictures and write captions. John Jane Pictures Captions a.) Who has the absolute advantage for taking pictures and writing Pictures Captions captions? 0 50 0 60 b.) Who has the comparative advantage for taking pictures and writing 15 25 20 30 captions? 30 0 40 0 a.) Jane has the absolute advantage at writing captions and taking pictures since she can take the most pictures and write the most captions.
Highest # of captions

b.) Comparative Advantage for Pictures for John:

Highest # of pictures

captions lost
Jane has the comparative advantage for pictures because she doesnt sacrifice as many captions as John would.

Comparative Advantage for Pictures for Jane:

captions lost

-------------------------------------------------------------------------------------------------------------------------------------------------------Comparative Advantage for Captions for John:

John has the comparative advantage for captions because he doesnt sacrifice as many pictures as Jane would.

Comparative Advantage for Captions for Jane:

Adam Smith and Capitalist Goods: Adam Smith: Founder of free market and pure capitalism Believed that a free market = free people Background to Smiths ideas were: Enlightenment Mercantilism Only set amount of wealth = Increased competition Believed in the invisible hand. Means that by pursing their own self-interest, people in a market system are led by an invisible hand to promote societal wellbeing. Government is the devil. Laissez Faire Self interest Basic Capitalist Principles: 1) Goods and Services Are produced for a profitable exchange 2) Human Labor Is a commodity for sale Labor is a source of value 3) The Invisible Hand Self-interested individuals Greed Market is self-regulatory due to competition and a self-interest of bother sellers and buyers 4) Law of Supply and Demand Individuals who are free to pursue their self-interest will produce goods and services that others want, at prices others are willing to pay 5) Competitive Market System Producers are compelled to be increasingly efficient, and to respond to the desires of consumers (outputs) 6) Societal Division of Labor It will maximize the satisfaction of individual wants and needs, given scarce resources (comparative advantage) 7) Government Should interfere with the Free and Efficient Workings of the Market Laissez-faire Leave things alone!