Econ homework -Opportunity Costs and Scarcity

Key Economic

Principles1/8/19 Soak up the Sun by Sheryl Crow

Agenda for today

• What is economics and what will this

course offer?

• Course overview

• Some ideas all (good) economists

agree about

Big Questions

1. What is economics?

2. What are the 12 principles of economics

according to K&W?

Here are questions for you…

• When you hear the

term “economics,”

what words come to

mind?

• What about when

you hear

“environmental

economics?”

Here are questions for you…

• When you hear the

term “economics,”

what words come to

mind?

• What about when

you hear

“environmental

economics?”

What will this Course Offer?

• Some tools to

– Discover a bit more about how humans work

– Understand public discourse a bit more e.g.

what is so great about competitive markets?

– Offer some additional ways to analyze the

world

• The chance to debate freely and

respectfully some of the most important

ideas of our time

What this Course will Not Do

• Sell any particular economic system

• Advocate for any particular part of the

economy

• Argue that it is all about the money

• Justify actions of governments

What Is Economics?

• The study of one set of ways people make

decisions – about human behavior

• In particular, economics is a set of concepts

(models) of how people behave in the

everyday situation of limited resources.

What are resources? What are models?

• Economy comes from Greek word meaning

"one who manages the household."

Microeconomics and

Macroeconomics

• Microeconomics

– Focuses on individual components of the

economy - individuals, firms, markets.

Environmental and natural resource economics

is mostly microeconomics.

• Macroeconomics

– looks at the economy as a whole after grouping

the individual components

Economic theory versus

empirical analysis

• Theories are the ideas about what

should/may happen in a situation.

This is the “story.”

• Empirical analysis

Examples

• Theory: Air pollution in Beijing is

mainly caused by cars, because we

know there are a lot of cars, #cars is

rising, etc.

• Empirical analysis: each additional

car in Beijing increases 24-hour

average PM2.5 concentrations in the

atmosphere by 0.0002

micrograms/m3

Course Overview

• Lectures due to size of class, with periodic in-

class exercises and open discussions as group.

• I will be throwing out questions for

consideration. If you can, please try to

answer them, ask questions or give

comments. It makes the class more

enjoyable for everyone!!!

• Readings to support each class reading

– Text by Paul Krugman and Scott Wells

• 2 exams, 1 final examination

• 4 problem sets to practice techniques

Review Syllabus

• Available like everything else on D2L

10 Widely Accepted Microeconomic

Principles (Translated from K&W)

1. Scarcity creates need for choices

2. All costs are opportunity costs

3. Many decisions are “marginal”

4. People often respond to incentives

5. Trade can make people better off

6. Equilibrium is an important concept

Microeconomic Principles

Continued

7. Efficiency is important

8. Markets can help us achieve efficiency

9. Government policy can help improve market

outcomes

2 Widely Accepted Macroeconomic

Principles (for another course)

10.One person’s spending is another’s income

11.Spending can be too high or too low (maybe

a bit more controversial)

12.Government policies can change spending

# 1: Scarcity and Choice -1

• In normal words, what does it mean for

something to be scarce?

• In economics, scarcity is when everyone

cannot have all s/he wants for free

• Is scarcity a common situation? Why?

• No Harry Potter-type technologies

• People have wants – maybe not unlimited,

but they exist….

# 1: Scarcity and Choice -2

So……Desirable + Costly = Scarce

# 1: Scarcity and Choice - 3

• Scarcity is what creates the need for

decisions and choices.

• Key questions we need to answer

– How do people make choices in environments

of scarcity?

– What choices do we expect from human

institutions?

– What are some notions of “best” choices?

– How do we know if people made bad choices?

# 1: Scarcity and Choice - 3

• Scarcity is what creates the need for

decisions and choices.

• Key questions

– How do people make choices in environments

of scarcity?

– What choices do we expect from human

institutions?

– What are some notions of “best” choices?

– How do we know if people made bad choices?

In a broad sense, these are the questions that good

economics tries to answer

• What can be said about scarcity?

A. Scarcity forces us to make choices.

B. Scarcity doesn’t affect the super-wealthy.

C. Scarcity only affects commodities such as

oil.

D. Scarcity generally doesn’t affect our day-

to-day living.

How Would you Answer?

What is the Cost of Watching

Gangnam Style and Similar Videos?

#2: All Costs Are Really

Opportunity Costs—1

• Opportunity Cost

– The highest-valued alternative that must be

sacrificed to get something else

• Not all alternatives—just the next-best choice

Scarcity  Choice  Opportunity Cost

• What is the opportunity cost of

attending college?

• What about room and board?

#2: All Costs Are Really

Opportunity Costs— 2

• What is the cost of coming to

this class?

• What is the cost of missing this

class?

#2: All Costs Are Really

Opportunity Costs—3

Go to the board

• What are some resources you have

to make decisions about?

• How do you make those decisions

A couple more questions

• How many apps will you download in

your lifetime?

• How many meals will you have in

restaurants next year?

• How many times will you go to

movies next semester?

You get the point………..

• Economic thinking

– Something resembling a

purposeful evaluation of available

opportunities to make the best

decision possible

• Marginal analysis

– Implies decision-makers may

evaluate whether the benefit of

one more unit of something is

greater than the cost

#3: In Other Words….Much Economic

Decisionmaking is “Marginal”—1

#3: Silly example of marginal

analysis—2

• Suppose you are vacuuming your living

room. Will you move the couch and china

cabinet to vacuum under them?

– Marginal benefit

• Small additional amount of carpet is cleaned

– Marginal cost

• Much more time and effort

#3: Not-so-silly example of

marginal analysis—3

• The governor decides to increase

funding for education. However, this

will mean decreasing funding for

infrastructure.

• We would suppose an individual will do

an action if…

A. the probability of success is greater than

50 percent.

B. the action has positive benefits.

C. the costs of the action are small.

D. marginal benefits ≥ marginal costs.

Suppose this marginal

decisionmaking is correct, then...

• Incentives

– What are you trying to

achieve? What

motivates YOU?

• A simple model of human behavior– people

try to do the best they can

#4: People often respond to

incentives—1

#4: Incentives Matter—2

• Who likes standing in line at grocery

store? Who likes spending more money

than you have to?

• Probably on average not right to model

people as wanting to waste resources

– People not optimizing robots

– Things other than money and self-interest

matter, But………

• The point: Opportunity costs should

affect decisions

#5: Trade can make people better

off • Who likes a good garage sale? What is so

great?

• The so-called “demand” side

• People have different valuations of goods and

services – people are different!

• People and institutions (e.g. firms) also have

different qualities and quantities of resources ->

skills and natural resources

• Opportunity costs differ

So, specialization is quite important

for efficiently using resources -> the

supply side

#5: Idea is that trade creates

value

• Markets

– Institutions that bring buyers and sellers

together to exchange goods and services

• Trade

– The voluntary exchange of goods and

services between two or more parties

– People exchange only if it benefits them (see

marginal analysis slides)

• Without trade, you would have to

produce everything you consume.

• Trade fosters exchange of goods

and promotes specialization.

• Comparative advantage

– The situation in which an individual,

business, or country can produce at a

lower opportunity cost (i.e. give up

less) than others

#5: Trade Creates Value—2

#5: Trade

• From your experience and understanding,

is it true that trade can make everyone

better off?

• What problems have you observed that

may sometimes call this assertion into

question?

#6 – Equilibrium is an

important concept

• Natural “resting” place of a system

• In this course, market equilibria will

be important.

• What would be the characteristics of

a good equilibrium? Bad equilibrium?

#7 – Efficiency – good use of

resources is a very important goal

• “Best use of resources”

• Big topic. More to come

#8 – Markets can help achieve

efficiency

• Billions of decisions are made every

day – Need to find a way so things valued highly are

done and low valued activities are left out.

• Net benefits (e.g. profit) play key roles

in signaling value. Again, not

everything….

• Competition and entry are important

as we will see

#9: Governments and other nonmarket

institutions can help improve market

(and non-market) outcomes

• What does it mean for markets to not

do well?

• Key Examples

– Market power

– Externalities

– Equity

• Protect/provide “services” markets

may not provide (e.g. environmental)

Conclusions

• Economics tries to understand human behavior

vis-à-vis resources. This is what makes the

study of economics so fascinating.

• There are some microeconomic ideas that are

pretty well-accepted and relevant for us

1. Scarcity creates need for choices

2. All costs are opportunity costs

3. Many decisions are “marginal”

4. People often respond to incentives

5. Trade can make people better off

Conclusions continued

6. Equilibrium is an important concept

7. Efficiency is an important goal.

8. Markets can help achieve efficiency

9. Governments and other nonmarket

institutions can help improve outcomes.