Economics on Main Street: Concepts for American Voters

1. Economics on Main Street:Concepts for American Voters May 2012

2. Introductory Notes • About the Prof (introduction, questions?) • About the Students (please fill out & turn in) • Sessions and Topics (see next slide)

3. Sessions & Topics • Fundamental Tradeoffs and Economic Growth • Markets Are Perfect, Except When They’re Not • Income Inequality & Jobless Recoveries • Public Goods & Sustainable Social Contracts

4. Fundamental Tradeoffsand Economic Growth (1) fundamental tradeoffs

5. Dylan, a sophomore at ISU, is considering what to buy this week. He wants the latest IPod Touch and Beats headphones. He wants a portable computer so he can take some weekend trips and keep up with class work. He wants to take his girlfriend out to dinner at a really nice restaurant back home in Lockport. One of the guys he shares an apartment with has quit school and is leaving. Dylan wants a room of his own. His part-time job is interfering with his school work and he wants to quit work. He saw a new mountain bike at that cycle shop near campus and he wants it. Will all of Dylan's wants be satisfied? What will Dylan have to do?

6. What Dylan Wants • scarcity and tradeoffs unlimited wants, limited resources, choice. opportunity cost in every decision. • applications society (limited land, labor & capital) individuals (limited income, abilities & time) organizations (human, financial & technical)

7. A Primitive Civilization • we are a small primitive tribe ( our goal is simple: survival ) • what are our specific wants? • what are our limited resources?

8. A Primitive Civilization Food (meals per week) a (0, 15) 15 10 5 5 f (5, 0) 0 1 2 3 4 5 0 1 2 3 4 5 Shelter (covered rooms)

9. A Primitive Civilization Food (meals per week) a (0, 15) 15 b (1, 14) Production Possibilities (given known resources) c (2, 12) 10 d (3, 9) e (4, 5) 5 5 f (5, 0) 0 1 2 3 4 5 0 1 2 3 4 5 Shelter (covered rooms)

10. PPF for a Primitive Civilization Food (meals per week) a 15 b c Unattainable 10 d e 5 5 Attainable f 0 1 2 3 4 5 0 1 2 3 4 5 Shelter (covered rooms)

11. Production Possibilities • resources, scarcity & opportunity cost ( opportunity cost = sacrifice / gain ) ( all of our choices involve opportunity cost ) • increasing opportunity cost why? unique resources and alternative uses ( consider tribe resources, food & shelter ) ( a-to-b sacrifice of 1, e-to-f sacrifice of 5 ) ( unique resources, start with low cost options )

12. Changing Slope of PPF slope of PPF steeper as more shelter is produced . . . . this reflects increasing opportunity cost Food a 15 b c 10 d e 5 5 f 0 1 2 3 4 5 0 1 2 3 4 5 Shelter

13. Production Possibilities • resources, scarcity & opportunity cost • increasing opportunity cost • variety of applications society & production decisions, individuals & consumption choices, households & competing uses of time

14. Scarce Resources, Basic Tradeoffs Everything Else a b Decisions Faced by Every Society? c d e f One Thing

15. Scarce Resources, Basic Tradeoffs Everything Else a How Much Devoted to Shelter (Housing)? b c d e f One Thing

16. Scarce Resources, Basic Tradeoffs Everything Else a How Much Devoted to Health Care? b c d e f One Thing

17. Scarce Resources, Basic Tradeoffs Everything Else a How Much Devoted to ANY GOOD? (subject to increasing opportunity cost) b c d e f One Thing

18. Scarce Resources, Basic Tradeoffs Everything Else a b Our Choices As Consumers? c d e f One Thing

19. Scarce Resources, Basic Tradeoffs Everything Else a b Home Improvement? Dining Out? Travel? c d e f One Thing

20. Scarce Resources, Basic Tradeoffs Everything Else a b Competing Uses of Time? c d e f One Thing

21. Scarce Resources, Basic Tradeoffs Earned Income dual careers $71,000 two flexible jobs $56,000 one full time $40,000 one part time $18,000 Household Time

22. Scarce Resources, Basic Tradeoffs Income a b Retirement Decisions c d e f Time

23. Economic Decisions • balancing costs & benefits at the margin required tradeoffs (MC), willing tradeoffs (MB) • society & production decisions food vs shelter? guns vs butter? energy vs ??? who decides (a few alternative approaches)? • a disturbing trend in our public discourse diverse views do not preclude consensus, however . . . it helps to agree on the required tradeoffs (PPF), . . . when interest groups are the information sources.

24. Environmental Well-being a Consider tradeoffs associated with coal, oil, natural gas & nuclear. b c d e f Energy Production

25. Environmental Well-being If everyone agrees on PPF then will focus on relative benefits of the two goods. Public choice to select which of available points is preferred. a b c d e f Energy Production

26. Environmental groups claim severe cost and limited product. Industry groups claim low cost and abundant product. Consensus solution less clear. Environmental Well-being a e Energy Production

27. Fundamental Tradeoffsand Economic Growth (2) sources of economic growth

28. Questions for Our Tribe Our standard of living appears to be constrained by our production possibilities. • can we expand our production possibilities? • what choices make this possible?

29. Food PPF defines limits of current consumption b a Shelter

30. Economic Growth Food m economic growth leads to new possibilities k b old limits g a Shelter

31. Indicators of U.S. Economic Growth

32. economic growth around the world (real gdp per capita, average annual growth)

33. Questions for Our Tribe Our standard of living appears to be constrained by our production possibilities. • can we expand our production possibilities? • what choices make this possible?

35. Spring (salmon) Fall (wildlife) Forest Winter (shellfish & berries) River Stone Circles Shallow Cove Mountain Summer (fish & roots) Ocean

36. Sources of Economic Growth • find additional resources • exploration & discovery • tribe example? opportunity cost? • create additional resources • capital investment • tribe example? opportunity cost? (how about population growth?)

37. Sources of Economic Growth • enhance productivity of current resources human capital development • tribe example? opportunity cost? innovation, productive ideas • tribe example? opportunity cost? conservation of natural resources (how about specialization and exchange?)

38. Sources of Economic Growth • investment choices • capital investment , human capital investment, exploration & discovery, innovation, conservation • all have current cost, future benefit

39. Sources of Economic Growth Capital Goods m growth determined by current choices k b g a Consumption Goods

40. Sources of Economic Growth Capital Goods m k current consumption does not promote growth b old limits g a Consumption Goods

41. Sources of Economic Growth Capital Goods m current investment does promote growth k b old limits g a Consumption Goods

42. Sources of Economic Growth • investment choices • capital investment , human capital investment, exploration & discovery, innovation, conservation • all have current cost, future benefit • implications of diminishing returns (growth limited when relying on one source alone) • private (individuals, firms) or public

43. Sources of Economic Growth