January 15 Class Notes
I. Intro to Economics
A. How did we become so wealthy?
1. You’re alive
2. Your parents are alive
3. Basic security from disease/attack
4. We use modern technology
5. We live in a house with a floor and walls
B. This is not normal, according to human history and how much of the
planet still lives.
C. Wealth ≠ Money. Rather, it is a measure of what we can consume.
1. This is largely determined by what you can produce.
2. We were not this wealthy until about 200 years ago.
D. Production technology’s correlation to explosive population growth
II. Defining Economics
1. Explaining human behavior
2. Common sense
3. Way of looking at the world
4. Terminology and jargon
B. Not About
1. Money (rather, it is what you can do with your money
C. Incentives Matter
1. Incentive: reward or punishment for doing something
D. People Face Tradeoffs
1. Opportunity Cost: what you give up (cost of next best alternative)
E. Trade makes people better off & Trade occurs in markets
1. Voluntary trade January 17 Class Notes
I. Markets & Trade, Continued
A. Markets are impersonal, imperfect
B. Prices are regulated by demand
1. How high the seller can set their prices and still get people to
buy their product
C. When people trade, they have the opportunity to specialize
1. This is the opposite of complete self-sufficiency
− Indigenous groups in Amazon rainforest
− Specialization is doing one thing really well, then trading
that good/service in markets for the goods one does not
produce, but needs to have a good quality life/survive.
− The more specialized a person is, the better the good they
ú Higher quality, more efficient production, etc.
2. Markets lead you to provide things for other people that you
don’t care about, because you are compensated for it.
− This is generally why communism fails.
ú “They pretend to pay us and we pretend to work”.
3. Markets increase standard of living much faster
− A country’s standard of living depends on its ability to
produce goods and services.
− The more globalization, the wealthier we are
− Products from areas where they have lower value are
often sold in places where their value is higher.
A. Protection of resources, property, other rights
1. Farmer is secure in knowing her corn isn’t going to be stolen,
based on protection of property rights. Thus, institutions help
− This also increases incentive to produce
B. Government can improve market outcomes
1. Help avoid externalities
− Prevention of pollution.
− Prices rise when the government prints too much money
III. How economists view the world A. Positive vs. Normative economics
1. Positive: predicting the consequences of an action
− Problem = world economic conditions are constantly
− Example: “if we give monetary subsidies to low-income
families for childcare, there will be more low-income
children in childcare.”
2. Normative: determining what should happen
− Example: “It is good to have more children in childcare.”
B. Economists make Assumptions
1. And test them
C. Economists use models
1. Models: an abstraction of reality that is easier to
2. Extract from reality January 22 Class Notes
A. Circular Flow:
− Buy goods & services (occurs in product market); (offset
by monetary flow from firms to households for factors of
− Sell factors of production [resources]
ú Natural Resources
ú Capital Resources
• Physical Capital
− Buy factors of production
ú Combine resources to produce something of value
• More efficient production
• New product
− Sell goods & services (offset by monetary flow from
household to firm, which occurs in product markets) B. Production and Possibility Frontier Model:
− $100 per month
− 2 Item economy
ú pizza ($2 per slice)
ú soda ($1 per bottle)
− No saving
2. Income increase only way to reach points that are unattainable.
3. Anything below line of efficiency=waste of resources, inefficient.
4. Individual preference is way to determine preferences
− (Ratio of soda to pizza)
5. Tax on soda would change slope on line
− Decreases number of bottles you can buy with your
6. Housing/Healthcare Production Frontier Model − Labor (most important resource)
ú If we build fewer houses and do more healthcare,
we will need fewer skilled house-builders.
ú Countries with more skilled laborers=wealthier than
countries with more natural resources and less-
− Resources are specialized
ú They are hard to transfer, geographically and
ú As they are re-allocated, the opportunity cost
• Marginal Cost vs. Marginal Benefit
o Law of diminishing returns
ú This is called Production Possibility Frontier
• Idle resources are below curved line
• Unattainable (above curved line)
o Can be reached through economic
o This curve moves to the right (econ
growth) 2% per person, annually.
II. Trade: Introduction & History
A. 1500-1750 à 0.2% per year
B. 1750-1850 à 1% per year
C. 1850-1950 à 1.5% per year
D. rule of 72.
1. 72/growthrate=# years it takes to double January 24 Class Notes 9/25/13 10:39 PM
I. Trade: Introduction and History continued
A. US constitution gives congress right to regulate trade.
1. Framers wanted to support free trade
B. David Ricardo
1. Argued British “Corn Laws” were bad for the people
− Lowering cost of food also lowers cost of living
− Bad for British corn farmers, but a vast majority of the
population would benefit.
2. Trade, like innovation, both creates and costs jobs.
3. Trade breeds friendship
− Promotes international peace, prosperity, cooperation.
− Globalization (since late 1800’s)
ú British financial backing for US railroads
ú Declined during/since Great Depression
II. Comparative and Absolute Advantage
A. Absolute Advantage: you’re just better at producing something than
B. Comparative Advantage:
III. Numerical Example 1
1. Our world consists of two people, living on two separate islands
2. They can each produce only one thing
3. two resources on each island
B. Island 1- Robinson Crusoe
1. works 8 hours per day
− 3 fish/hour
− 2 coconuts/hour
2. The cost of 1 fish is 2/3 coconut.
3. The cost of 1 coconut is 1 ½ fish.
C. Island 2- Tom Hanks
1. Works 8 hours per day
− 2 fish/hour
− 3 coconuts/hour 2. The cost of 1 fish is 1½ coconuts.
3. The cost 1 coconut is 2/3 fish.
D. Opportunity Costs:
1. Fish are cheaper on Crusoe Island.
2. Coconuts are cheaper on Hanks Island.
E. Trade and Specialization:
1. What is production when Hanks and Crusoe spend ½ day on
Crusoe Island 12 8
Hanks Island 8 12
Total 20 20
2. What is production if each specializes?
Crusoe Island 24 0
Hanks Island 0 24
Total 24 24
3. What if they trade 12 fish (from Crusoe Island) for 12 coconuts
(from Hanks Island)?
Crusoe Island 12 12
Hanks Island 12 12
Total 24 24
− When they trade, both are better off. (can consume more).
IV. Numerical Example 2
A. Crusoe Island
1. Works 8 hours/day
− 3 fish/hour
− 2 coconuts/hour
2. 1 fish costs 2/3 coconuts.
3. 1 coconut costs 1 ½ fish.
B. Hanks Island
1. Works 8 hours/day
− 2 fish/hour − 1 coconut/hour
2. 1 fish costs ½ coconut
3. 1 coconut costs 2 fish.
C. Hanks spends 4 hours fishing and Crusoe spends 2 hours fishing
Crusoe Island 6 12
Hanks Island 8 4
Total 14 16
D. What happens if they specialize?
Crusoe Island 0 16
Hanks Island 16 0
Total 16 16
E. Robinson Crusoe trades 4 coconuts for 7 fish (price negotiated)
Crusoe Island 7 12
Hanks Island 9 4
Total 16 16
F. They are still better off by 1 fish than if they had not specialized, even
though Tom Hanks kinds sucks overall. January 29 Class Notes 9/25/13 10:39 PM
I. Review of Comparative Advantage
A. Thinking about comparative advantage and trade
1. Trade leads to cooperation between stats/individuals (NOT
2. If trade makes people better off, self sufficiency makes people
B. An Example:
1. Crusoe: 1 coconut costs him 1.5 fish
− He would like to get more than 1.5 fish for each coconut
he gives up, say 1.75 fish
2. Hanks: 1 coconut costs 2 fish.
− He would like to get 1 coconut for less than 2 fish, say
3. Thus, they are both better off at this price
C. When trade won’t occur
1. If the price is greater the opportunity cost.
2. Terms of Trade are important.
D. Trade as a Roundabout Way of Producing Things
1. Even though Crusoe was only producing coconuts, he was also
producing fish because he trades the coconuts for the fish and
is thus consuming both.
II. US Trade & Comparative Advantage
A. What Does the US Export and Import?
1. Exports 2011 ($ Billions)
− Machinery $205.2
− Electronic Equipment $158.9
− Oil $129.5
− Vehicles $119.5
− Medical & Tech Equipment $79.1
− Precious Metals $71.8
− Plastics $58.6
− Organic Cehmical $45.6
− Pharmaceuticals $38.8
2. Imports 2011 ($ Billions)
− Oil $464.3
− Machinery $293.9 − Electronic Equipment $283.3
− Vehicles $206.0
− Medical & Tech Equipment $67.1
− Precious Metals $66.1
− Pharmaceuticals $66.0
− Organic Chemicals $57.0
B. Who Does the US Export to And Import From
1. Exports $1,480 Billion
− We tend to trade with countries very close to us, or very
wealthy like us
ú South Korea
ú Hong Kong
2. Imports 2,207.8 Billion
− Most are wealthy, industrialized
ú South Korea
ú Saudi Arabia
C. Don’t We Need Manufacturing Jobs?
1. Overall decline in share of US employees since 1980
2. Manufacturing output continually rising − We just need fewer people to successfully manufacture
− This is largely due to technological advance
III. Does trade really make people better off? A Simulation
A. No one traded based on prices
B. Likert scale of happiness grows with opportunities to trade
C. Symbolizes reallocation of goods in economy
D. Information is important in trade
IV. January 31 Class Notes
I. Establishing Prices
A. They are what they are- Not Objective.
B. Depicts ideas about value
1. Not based on intrinsic worth, rather what people are willing to
2. Diamonds vs. Water
II. Law of demand
A. People are willing to buy things, based on how much money they have
and how much they want a good/service
1. This is objective.
2. Value of item
B. Demand Shifters
− Inferior goods: people consume less of these as their
ú Ramen noodles
3. Tastes and Preferences
4. Expectations of Future Prices
− Cost of flashlight in week leading up to hurricane
5. Prices of Related Goods
ú Skis and Ski Poles
ú Gasoline and Cars
ú If the price of a substitute goes down, the demand
rises for both products
ú Coke & Pepsi February 4 Class Notes
A. Law of Supply
1. Holding everything else in the world constant, at a higher price
suppliers are willing and able to produce more product
− Opportunity costs
B. Supply Shifters
1. Price of Inputs
− When the price of inputs rises, supply curve shifts to the
right (not sure I get this)
− When superior technology develops, supply curve shifts to
3. Taxes & Subsidies
− If there is a tax, demand curve shifts to the left.
− If there is a subsidy, demand curve shifts to the right.
4. Natural Weather
5. Number of producers
− Shifts curve to right.
II. Equilibrium Price and Quantity
A. Price of oil
1. Upward sloping supply curve (as price rises, quantity produced
2. Downward sloping demand curve (as price rises, quantity
3. At one price, the desires of both intersect. This is the
equilibrium, or market-clearing price-quantity combination.
B. Excess Supply
1. Occurs when price lends itself to producing more than
demanded. (produce surplus)
− Produce less & lower price
ú This lower price increases quantity demanded
− Stockpile surplus Happy Valentine’s Day, BITCHZ 9/25/13 10:39 PM
I. How markets work
• Limitations GDP: Girls Don’t Poop