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

9. Economic Fundamentals • Self Interest • Rationality • Maximizing behavior • Responding to incentives • TANSTAAFL • Scarcity  Choices  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. 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 • $100 • $300 • $400

13. 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!

14. Economic Fundamentals • Unintended Consequences • CAFE standards • 27.5 MPG fleet average • Objective: Save energy + clean environment • 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

15. Results of Survey

17. 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!

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

19. 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.

20. 16.0 1980 14.0 1975 12.0 10.0 1970 Gun-Related Murders (Thousands) 8.0 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)

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 Verizon.

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 Verizon.

23. The acres of grass surrounding the Taj Mahal in Agra, India, are often cut by young women who slice off handfuls with short kitchen blades. Is this a low- or high-cost way to keep a lawn mowed? (#4, Problem Set 1)

24. Maximizing the Net Benefits from Pizza

25. TB TC Rational Behavior: Continue an activity until MB = MC MC MB

26. 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

27. 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

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

29. 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

30. 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

31. 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

32. 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

33. Alternative Definitions* *The following material will not be on the first exam.

34. 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

35. 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.

36. 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

37. Questions from the Problem Set

38. 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 Belgium: 1C : 1/5W Germany: 1C : 1/2W