1APEconomicsChapter2TheDisciplineofEconomics-ByJacindaJia2TopicListWhatiseconomicsMicrovs.MacroeconomicsPositivevs.normativeeconomicsOpportunitycostProductionpossibilitiesfrontierComparativeadvantage3EconomicsdefinedEconomicsisasocialsciencethatstudieshowresourcesareusedandisoftenconcernedwithhowresourcescanbeusedtotheirfullestpotential.Considerthecaseofastudentwhohasonly24hrstospendeachday.Oneproblemeverystudentfacesisjusthowmuchtimeshouldbeallocatedtoeachofthevariousactivitiesthatmakeforafulllife.Thisisaneconomicproblem,sincethestudentmustdecidehowtheresource(time)willbeusedtoitsmaximumpotential.4EconomicsdefinedThedisciplineofeconomicsisnotdirectlyconcernedwithmoneyorpoliticsorthestockmarket,howevereconomicproblemsaboundineachoftheseareas.1.Peoplewanttospendtheirmoneyinthebestway.2.Politicianswanttomakedecisionstoachievethemaximumbenefit.3.Investorswantthehighestreturnfromtheirearnings.Anytimesomeoneistryingtomakethemostoutofwhathehas,weareintherealmofeconomics.5Macroeconomicsvs.MicroeconomicsMicroeconomicsThestudyofhowhouseholdsandbusinessesmakechoices,howtheyinteractinmarkets,andhowthegovernmentattemptstoinfluencetheirchoices.MacroeconomicsThestudyoftheeconomyasawhole,includingtopicssuchasinflation,unemployment,andeconomicgrowth.6Macroeconomicsvs.Microeconomics?I:Theeffectofhighercigarettetaxesonthequantityofcigarettessold.A:Theeffectofhigherincometaxesonthetotalamountofconsumerspending.A:ThereasonsfortheeconomicsofEastAsiancountriesgrowingfasterthantheeconomiesofsub-SaharanAfricancountries.I:Thereasonsforlowratesofprofitintheairlineindustry.7NormativeandPositiveEconomicsThedisciplineofeconomicscanbesplitinanotherway-positiveandnormativeeconomics.Positiveeconomicsisbasedonthescientificmethod,andisconcernedwithwhatis.Normativeeconomicsinvolvesvaluejudgments,andisconcernedwithwhatoughttobe.8NormativeandPositiveEconomicsItmayappearasifpositiveeconomicsisasuperiorformofthedisciplinesinceitisgroundedinthescientificmethodandnormativeeconomicsisbasedonopinions.However,normativeeconomicsisacrucialpartoftheeconomicsdiscipline.Anyscientificstudywillrequireanexperiment,andexperimentscanbedesignedtohighlightascientist'sprejudices.Evenifaneconomistcankeephisbiasesoutofastudy,whydidhechoosethisparticularquestiontoinvestigate?Howevermucheconomistsstrivetobelikebiologistsandphysicists,therewillalwaysbealargenormativeaspect.9NormativeandPositiveEconomics/Analysis?A50-cent-per-packtaxoncigaretteswillreducesmokingbyteenagersby12%.ThefederalgovernmentshouldspendmoreonAIDsresearch.Risingpaperpriceswillincreasetextbookprices.ThepriceofcoffeeatStarbucksistoohigh.10ResourcesAresourceisanythingthatcanbeusedtoproduceagoodorservice.InMacroeconomicseveryresourceisclassifiedintooneofthreecategories:1.Land2.Labor3.Capital11OpportunityCost•OpportunityCostThehighest-valuedalternativethatmustbegivenupinordertoengageinanactivity.•Itiswhatmustbesacrificedtoobtainsomething.•P14table2.112ProductionPossibilitiesFrontierProductionpossibilitiesfrontierAcurveshowingalltheattainablecombinationsoftwoproductsthatmaybeproducedwithavailableresources.13ProductionPossibilitiesFrontierGraphingtheProductionPossibilitiesFrontier2-1BMW’sProductionPossibilitiesFrontier14DrawingaProductionPossibilitiesFrontierforRosie’sBostonBakery2-1LEARNINGOBJECTIVE1HoursSpentMakingQuantityMadeChoiceCakesPiesCakesPiesA5050B4142C3234D2326E1418F0501015ProductionPossibilitiesFrontierTwofactorscausethePPFtoSHIFT:1.Changesintheamountofresourcesintheeconomy2.Changesintechnologyandproductivity16ProductionPossibilitiesFrontiersShiftEconomicGrowthTheabilityoftheeconomytoproduceincreasingquantitiesofgoodsandservices.2-3EconomicGrowth17LawofincreasingcostsThePPFisnottypicallyastraightline.Opportunitycostwillnotbeconstantintherealworld.Thelawofincreasingcostsstatesthatasmoreofaproductisproduced,theopportunitycostincreases.RefertoTable2.2-p1718LawofincreasingcostsThePPFisnottypicallyastraightline.Opportunitycostwillnotbeconstantintherealworld.RefertoNextSlide!19ProductionPossibilitiesFrontiersIncreasingMarginalOpportunityCosts2-2Astheeconomymovesdowntheproductionpossibilitiesfrontier,itexperiencesincreasingmarginalopportunitycostsbecauseincreasingautomobileproductionbyagivenquantityrequireslargerandlargerdecreasesinaircraftcarrierproduction.Morefundsfortsunamireliefmeantlessfundsforothercharities.Trade-offsandTsunamiRelief2-120LawofincreasingcostsThelawofincreasingcostsstatesthatasmoreofaproductisproduced,theopportunitycostincreases.RefertoTable2.2-p1721LawofincreasingcostsThemoreofaproductthatisinitiallybeingproduced,thehighertheopportunitycostwillbetoproducemore.Concave-to-the-originPPFisduetothelawofincreasingcostsRefertofig2.3-p1822LawofIncreasingCosts-CausesWhengunproductionislow,theopportunitycostofincreasinggunproductionislow.Whengunproductionisincreased,theresourcesthatareadeptatmakinggunscanbeshiftedoffthefarmandintogunproduction----notmuchbutterwillbelost,butmanymoregunsareproduced.Theopportunitycostofgunsislowwhenalowlevelofgunsisbeingproduced.23LawofIncreasingCosts-CausesHowever:Imaginethesituationinaneconomythatisalreadyproducingalotofguns.Whentheresourcesareshiftedfrombuttertogunproduction,notmanymoregunsareproduced,butalotofbuttermustbesacrificed.24LawofIncreasingCosts-CausesSummaryItisduetothefactthatsomeresourcesaremoreadeptattheproductionofonegoodthananother.Whenresourcesareforcedtoworkinanindustrywheretheyarenotproficient,theyarelessproductive.Thus,theopportunitycostofproducingagoodbecomesgreaterasmoreresourcesareforcedintotheindustrieswheretheyarenotasproductive.ThiscausesthePPFtobeconcavetotheorigin.25LawofIncreasingCosts-CausesTheideaofincreasingmarginalopportunitycostsillustratesanimportanteconomicconcept:themoreresourcesalreadydevotedtoanyactivity,thesmallerthepayofftodevotingadditionalresourcestothatactivity.26Illustration1:Themorehoursyouhavealreadyspentstudyingeconomics,thesmallertheincreaseinyourtestgradefromeachadditionalhouryouspend–andthegreatertheopportunitycostofusingthehourinthatway.27Illustration2:ThemorefundsafirmhasdevotedtoR&Dduringagivenyear,thesmallertheamountofusefulknowledgeitreceivesfromeachadditionaldollar----andthegreatertheopportunitycostofusingthefundsinthatway.28ExerciseP26Free-ResponseQuestions29ComparativeAdvantageComparativeadvantageTheabilityofanindividual,business,orcountrytoproduceagoodorserviceatthelowestopportunitycost.OpportunityCostThehighest-valuedalternativethatmustbegivenuptoengageinanactivity.Eg:Table2.4-p2030AbsoluteadvantageTheabilitytoproducemoreofagoodorservicethancompetitorswhenusingthesameamountofresources.Eg:Table2.3-p19Portugalhastheabsoluteadvantageinproducingbothproducts31ComparativeAdvantageinInternationalTrade32ComparativeAdvantageinInternationalTrade1.Thebasisfortradeiscomparativeadvantage,notabsoluteadvantage.2.Acountryhasacomparativeadvantageintheproductionofthegoodforwhichithasaloweropportunitycost.3.Toenjoythegainsfromtrade,acountryshouldspecializeintheproductionofthegoodforwhichithasacomparativeadvantage.33ComparativeAdvantageinInternationalTradeAnExampleofJapaneseWorkersBeingMoreProductivethanAmericanWorkers8–1OUTPUTPERHOUROFWORKCELLPHONESMP3PLAYERSJapanUnitedStates12264OPPORTUNITYCOSTSCELLPHONESMP3PLAYERSJapanUnitedStates0.5MP32MP32cellphones0.5cellphoneTheOpportunityCostsofProducingCellPhonesandMP3Players8–234AutarkyAsituationinwhichacountrydoesnottradewithothercountries.35TheGainsfromTradeIncreasingConsumptionthroughTradeTermsofTradeTheratioatwhichacountrycantradeitsexportsforimportsfromothercountries.ProductionwithoutTrade8–3WITHOUTTRADEPRODUCTIONANDCONSUMPTIONCELLPHONESMP3PLAYERSJapanUnitedStates9,0001,5001,5001,00036IncreasingConsumptionthroughTradeTheGainsfromTradeforJapanandtheUnitedStatesWITHOUTTRADEProductionandConsumptionCELLPHONESMP3PLAYERSCELLPHONESJapan9,0001,500UnitedStates1,5001,000WITHTRADEProductionwithTradeTradeConsumptionwithTradeCELLPHONESMP3PLAYERSMP3PLAYERSCELLPHONESMP3PLAYERSJapan12,0000Export1,500Import1,50010,5001,500UnitedStates04,000Import1,500Export1,5001,5002,500GAINSFROMTRADEIncreasedConsumptionJapan1,500CellPhonesUnitedStates1,500MP3PlayersTheincreasedconsumptionmadepossiblebytraderepresentsthegainsfromtrade...andexportsomeofthatgoodinexchangeforthegoodtheothercountryhasacomparativeadvantageinproducing.Withtrade,theUnitedStatesandJapanspecializeinthegoodtheyhaveacomparativeadvantageinproducing...37TheGainsfromTradeWhyDon’tWeSeeCompleteSpecialization?¾Notallgoodsandservicesaretradedinternationally.¾Productionofmostgoodsinvolvesincreasingopportunitycosts.¾Tastesforproductsdiffer.RememberthatTradeCreatesBothWinnersandLosers38WhereDoesComparativeAdvantageComeFrom?Amongthemainsourcesofcomparativeadvantagearethefollowing:¾Climateandnaturalresources¾Relativeabundanceoflaborandcapital¾Technology¾ExternaleconomiesExternaleconomiesReductionsinafirm’scoststhatresultfromanexpansioninthesizeofanindustry.39WhyisDalton,Georgia,theCarpet-MakingCapitaloftheWorld?8-2BecauseCatherineEvansWhitenerstartedmakingbedspreadsbyhandinDalton,Georgia,ahundredyearsago,amultibillion-dollarcarpetindustryisnowlocatedthere.40Theend! APEconomics TopicList Economicsdefined Economicsdefined Macroeconomicsvs.Microeconomics Macroeconomicsvs.Microeconomics? NormativeandPositiveEconomics NormativeandPositiveEconomics NormativeandPositiveEconomics/Analysis? Resources OpportunityCost ProductionPossibilitiesFrontier ProductionPossibilitiesFrontier þÿ ProductionPossibilitiesFrontier ProductionPossibilitiesFrontiersShift Lawofincreasingcosts Lawofincreasingcosts ProductionPossibilitiesFrontiers Lawofincreasingcosts Lawofincreasingcosts LawofIncreasingCosts-Causes LawofIncreasingCosts-Causes LawofIncreasingCosts-Causes LawofIncreasingCosts-Causes Illustration1: Illustration2: Exercise ComparativeAdvantage þÿ ComparativeAdvantageinInternationalTrade ComparativeAdvantageinInternationalTrade TheGainsfromTrade TheGainsfromTrade WhereDoesComparativeAdvantageComeFrom? þÿ