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Economics 211Principles of
Microeconomics
Dr. Greg DelemeesterFall 2007
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?
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?
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
Matching and Price Competition Paying Not to Go to the Gym On the Simple Economics of
Advertising, Marketing, and Product Design
Economic Fundamentals Self Interest
Rationality Maximizing behavior Responding to incentives
Incentives Matter There are no $5 bills laying on the ground.
Economic Fundamentals Self Interest
Rationality Maximizing behavior Responding to incentives
TANSTAAFL Scarcity Opportunity costs
ThereAin’tNoSuchThingAsAFreeLunch
ThereAin’tNoSuchThingAsAFreeLunch
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 Ignore sunk costs
Economic Fundamentals Unintended Consequences
CAFE standards 27.5 MPG fleet average Lighter + smaller cars = more dangerous
cars ? National Academy of Sciences: 1300 to 2600
extra highway deaths each year
Modes of AnalysisPositive AnalysisNormative Analysis
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
0.0 0.5 1.0 1.5 2.0 2.5 3.0
Guns Sold (Millions)
Gu
n-R
elat
ed M
urd
ers
(Th
ou
san
ds)
1965
1970
1975
1980
Correlation is not causation.
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!
Economic Model of Crime
Policy Implications [How to deter crime?] Increase jail sentence Increase probability of arrest Increase probability of conviction Increase income
Production Possibilities Frontier Shows tradeoffs facing an economy that
produces two goods Assumptions
Resources are fixed Land Labor Capital Entrepreneurship
Technology is fixed
Beer
Cars
A
B
CD
E
Unattainable
Inefficient
Beer
Cars
A
B
C
D
Δ Beer
- Δ Cars
Slope of PPF = - Δ Cars / Δ Beer
Concave PPF implies “law of increasing opportunity cost”
(measures the Opportunity Cost)
Shifts in the PPF are due to: Change in resources Change in technology
Shifts in the PPF are due to: Change in resources Change in technology
PPF and Economic Growth
Economic Growth requires an expanding PPF
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
Choices, choices, choices…
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
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
Pizza Pizza
Cars Cars100
400
50
600
50 25
200
300
∆C = 50
∆C = 25
∆P = -200
∆P = -300
Country A Country B
Opportunity cost of 1 Car is 4 Pizzas Opportunity cost of 1 Car is 12 Pizzas
slope = ∆P/ ∆ C = -200/50 = - 4/1
slope = ∆P/ ∆ C = -300/25 = - 12/1
Country A has the comparative advantage in producing cars.
Pizza
Cars100
400
50
200
Country A
Pizza
Cars50
600
25
300
Country B
No Trade With Trade
Pizza Cars Pizza Cars
A
B
World
200
0600
0 100
500 75
25300
50
100600
Production
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