ECON 10a Lecture Notes - Lecture 2: Opportunity Cost, Super Bowl, Absolute Advantage

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Types of Disagreements btwn Econ Policy Advisors
Positive Disagreement
About the facts
About how the economy works
Normative Disagreements
Agree about the facts but disagree about what to do
Example :
A 10% Increase in Minimum Wage
Employers might respond to minimum wage raise, by employing less people
Therefore, Minimum Raise Up = Minimum Wage Jobs Down
Positive Argument
Two economists disagree on the facts of what minimum wage increase
would do
A = Reduce minimum wage jobs by 2%
B = Reduce # of minimum wage jobs by 30%
Normative Argument
They agree on the facts, C & D think Raise in Min. Wage = Reduce # of
minimum wage by 11%
C = raise it, the families who get better pay will be better off
D = don’t, what about the 11% of the people who will lose their jobs
2 Implications
1)
When economists disagree they don’t necessarily mean they disagree on
how the economy works, they many be having a normative disagreement
Economic Knowledge can eliminate positive disagreements but not
normative disagreements
2) Limit of Economics
Due to the fact that economic policy always has trade offs, there would
still be normative disagreements based on ethics
Positive V. Normative Statements
2 types of positive statements
Fact
The sun is x miles away from the earth
Predication
If you put your hand on a hot stove it will be painful
Positive Statements can be wrong
Ex. The Sun is 93 miles from the sun
Ex. X team will win the superbowl
Normative Statement
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Tell you what you should or shouldn’t do
You should
You should get a haircut
You ought to
You ought not put your hand on the stove
Sometimes the should is implied
Ex. Taxes on the rich are too low = Taxes on the rich
should
be higher
The PPF (Production Possibilities Frontier)
Maximum combinations of a goods society can produce in a given time period
If society manages to be perfectly efficient
2 goods, Bread and Wine
Society can produce any point along the frontier and inside the frontier
Society faces a trade-off, and anywhere along the line they decide how much wine
and bread to make
There can not be a point outside the possibilities frontier, that would require more
resources than
If a point is inside the possibilities frontier it is possible but inefficient, because it
offers less than a point on the frontier
Any point inside the frontier is inefficient in production, a lousy answer to how
much to produce
A point on the frontier is efficient in production
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When comparing points on the frontier, it is less obvious which is better, and to
know which one is better you need more information about the preferences of the
society
Goes along with the idea of Trade-Offs, because when you want more of one
thing, it is at the cost of something else
Opportunity Cost
of an item is what you give up to get that item
Society's Opportunity Cost is shown on the PPF
When deciding between 2 points on the PPF graph, what is there to consider
When creating more bread, it is at the opportunity cost of using those resources
for wine; and vice versa
There is always a benefit and a cost to everything
Gain Bread v. Lost Wine
Opportunity Cost V. Cast Cost
Ex. A Pizza
A cash cost is 11$
The opportunity cost = the goods you can no longer afford due to buying
the pizza, and the dollar value of these goods is 11$
In this case the cash cost = the opportunity cost
Year at Brandeis
Cash cost = tuition, fees, textbooks, 40$ Sapling, time
Cash Cost + Lost Salary (that you could make with the time not at college)
Most people will regain the cost of college in salary later in life
The cost of college takes into consideration opportunity cost
Simple Economy
Ernie has a 20 acre farm, and can grow Corn or Tomatoes, each acre can produce
EITHER
1 bushel of corn or 2 bushels of Tomatoes
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