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University of Vermont
EC 011

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 A. About 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 2. Business 3. greed 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 produce 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. II. Institutions 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 increase specialization. − This also increases incentive to produce B. Government can improve market outcomes 1. Help avoid externalities − Prevention of pollution. 2. Inflation − 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 changing − 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 apply/use/manipulate. 2. Extract from reality January 22 Class Notes I. Models: A. Circular Flow: Firms   Households   1. Households: − Buy goods & services (occurs in product market); (offset by monetary flow from firms to households for factors of production) − Sell factors of production [resources] ú Labor ú Natural Resources ú Capital Resources • Physical Capital 2. Firms: − 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: Soda/Pizza  Possibility  Frontier  Model   0,  100   100   All  Soda,  No  Pizza   90   80   70   60   a   o 50   S 40   40,  40   Unattainable   30   20   40,  20   10   0   50,  0     0   5   10   15   20   25   30   35   40  ll 45  a, 50   Soda   Pizza   C. 1. Assumptions: − $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 monthly income. 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- skilled workforce. − Resources are specialized ú They are hard to transfer, geographically and specialty-wise. ú As they are re-allocated, the opportunity cost increases. • Marginal Cost vs. Marginal Benefit o Law of diminishing returns ú This is called Production Possibility Frontier (curved line) • Idle resources are below curved line (unemployment) • Unattainable (above curved line) o Can be reached through economic growth 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 • WTO II. Comparative and Absolute Advantage A. Absolute Advantage: you’re just better at producing something than another person/firm/state. B. Comparative Advantage: III. Numerical Example 1 A. Assumptions 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 − coconuts − fish 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 each task? Fish Coconuts Crusoe Island 12 8 Hanks Island 8 12 Total 20 20 2. What is production if each specializes? Fish Coconuts 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)? Fish Coconuts 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 Fish Coconuts Crusoe Island 6 12 Hanks Island 8 4 Total 14 16 D. What happens if they specialize? Fish Coconuts Crusoe Island 0 16 Hanks Island 16 0 Total 16 16 E. Robinson Crusoe trades 4 coconuts for 7 fish (price negotiated) Fish Coconuts 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 competition) 2. If trade makes people better off, self sufficiency makes people worse off. 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 1.75 fish. 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 Canada ú Mexico ú China ú Japan ú UK ú Germany ú South Korea ú Brazil ú Netherlands ú Hong Kong 2. Imports 2,207.8 Billion − Most are wealthy, industrialized ú China ú Canada ú Mexico ú Japan ú Germany ú South Korea ú Saudi Arabia ú Venezuela ú Taiwan ú France 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 pay 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 1. Population 2. Income − Inferior goods: people consume less of these as their income rises. ú Ramen noodles 3. Tastes and Preferences − Advertising 4. Expectations of Future Prices − Cost of flashlight in week leading up to hurricane 5. Prices of Related Goods − Compliments ú Skis and Ski Poles ú Gasoline and Cars ú If the price of a substitute goes down, the demand rises for both products − Substitutes ú Coke & Pepsi February 4 Class Notes I. Supply 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) 2. Technology − When superior technology develops, supply curve shifts to the right 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 increases) 2. Downward sloping demand curve (as price rises, quantity demanded increases) 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 • Policies • Taxes II. GDP • Definition • Measures • Limitations GDP: Girls Don’t Poop
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