• What is economics?• Why do we trade (buy and sell)

goods and services? • Name the most interesting /

craziest / stupidest goods and services you can think of or have seen sold or advertised.

Do Now (Name as many reasons/items as you can – discuss with neighbor)

Economics

Definition:• The study of production, distribution, and

consumption of material goods and services in a society

What else does it study?• Purchases, jobs and trade between countries• Inventions, capital, labor, industry, stocks,

money and lots more!!!

TRADE

What does it mean?• To exchange something you have for

something someone else has

MARKETS

Markets are a basic unit of economics - through studying these, you can understand a lot about human nature and about what we value and need.

• Trades or exchanges are completed everyday around the world by every person for unimaginable amounts and types of things.

Markets in Everything:

In a society, if there is a need or a want for an item, it will be sold, but not always openly. (in a capitalist society, it will be sold openly in stores or on the street – where will it be sold if there are government restrictions on sale?

• Black/underground market

What’s on the market?• Pigeon blood as a virgin restorative• iPod application for managing multiple girlfriends• Cremated body parts baked into vinyl records(or sent

into space)• Albino body parts:

• A court in Tanzania has sentenced a Kenyan accused of trying to sell an albino to 17 years in jail and a fine of more than $50,000 (£41,200).

• Albino body parts are valued highly in parts of East Africa and many albinos have been enslaved and/or murdered as a result. It is believed that since 2007 there have been 53 albino killings in Tanzania

Essence of capitalism: free markets

"Tap water?" said Alison Szeli, 26, picking up the clear plastic bottle with orange letters: "Tap'd NY. Purified New York City tap water."

She studied the description: "No glaciers were harmed in making this water." She compared prices: Smartwater cost $1.85. Tap'd NY was 35 cents less.

iPod application for managing multiple girlfriends

Why do we trade? The simple story• Because both sides benefit and choose to!• Why do kids trade in the lunchroom?

– They trade what they value less for what they value more.

How much do you value a bottle of water?

How much would you pay for this bottle of water?

What if you were at a concert in the hot noonday sun you forgotto bring your own water?

How much would a bottle of water be worth to you in the desert, if you were literally dying of thirst?

But why was that juice box worth anything to the boy in the first example? Why was that water bottle

worth so much in the desert?

Scarcity – the idea that resources are always limited, but demands and wants are not

Key concept of economics: Scarcity

• There are only limited resources in the world

• Economics is a study of how these scarce resources are allocated– Without scarcity there

would be no economics, because there would be no economic problems.

– http://www.youtube.com/watch?v=Np-dZSdzymk

What would you want?1 – Any item or substance - but only 10 pounds

2 – Marooned on deserted island – any item or substance – but only 10 pounds

3 – Everyone has a replicator/genie – any item or substance – only 10 pounds

Scarcity Scenario - Genie's Wish• Scenario One: You come in for extra help someday and discover

that I am a Genie: I'll make appear whatever one item or substance you want - but it can only be 10 pounds of it. What would you want?

• Scenario Two: Similar scenario - but this time you are marooned on a deserted island for the rest of your life when you find the Genie's lamp. What would you want ten pounds of then?

• Scenario Three: A new technology has been invented and everyone has installed in their house a device that can make anything you want that is under 10 pounds. Everyone got it - its installed in motor homes, huts in the jungle, shacks in Brazil, even homeless people get their hands on a travel sized one.What would be the first thing you made then?

Why aren't your answers the same?

• Scenario 1 - why not 10 pounds of $100 bills? ($450,000 - not too shabby)

• Scenario 2 - collected books of Shakespeare, all of the books in the Song of Ice and Fire series, maybe toilet paper? Flint and steel? A really comfortable pillow?

Survival and comfort are most important - different needs

• Scenario 3 - no scarcity - no monetary value to anything made

Markets set prices based on supply and demand

• Why are the answers so different - because of supply and demand - two concepts directly tied to scarcity

• Supply - how much of something there is

• Demand - how much of something people want/need

• Quantity demanded is high when price is low, quantity supplied is high when price is high (moving along line)

(Legos) - Why do people pay $20, $50, or $100 dollars for pieces of plastic brick?

Why????• Why does college cost so much?

• In 2003 tuition for out of staters atPenn State’s Main Campus was $18,918 for a year.• 2011- it was $27,206 for a year (33% more in 8

years)• In 1991 - it was $9,000 for a years tuition (in 20 years

it tripled in price

Why?• There are only limited seats at prestigious institutions (limited supply)• Increasing desire for people to go to college to get good jobs (increasing

demand)• Most jobs nowadays need a college degree - and people with college

degrees earn considerably more than just high school diplomas, AND have a much lower chance of being unemployed.

• 2009 median income full time workers ages 25-34Both: HS Diploma $30,000; Bachelor's degree

$45,000

It is a scarce resource (high level colleges) and huge and growing demand

(there are other reasons - such as states cutting funding to state schools, etc.)

Why do sports stars get paid so much (on the flip side of the coin, why do teachers and nurses get paid so

little?)

Supply and Demand Activity

With a partner - name 5 items which have changed in price because of supply and demand (and if possible explain the supply or demand that affected it)

• Beanie babies - huge demand, limited supply. Now - huge supply - limited demand

So - now that you understand how prices are set, and understand how markets work - is there such a thing as a price that is unfair?Remember the bottle of water in the desert.

“Price gouging”

The Many Benefits of "Price Gouging"

Remember the bottle of water in the desert. What if you were dying of thirst when I appeared with one

bottle, but a random guy pops up (who isn't dying of thirst) and buys the last bottle for $5. He walks away with his thirst quenched, and you die of dehydration.

What are the benefits of price gouging?Encourages delivery of more supplies

If you owned an electronics shop in NJ, and heard that down in Virginia an Earthquake the price of batteries increased five fold - what would you do?

Deliver them some batteries!

Two good results - batteries get to people who need them AND the price of batteries drops (more supply)

Encourages shopkeepers to stay open If a hurricane is coming, I would close my shop up really early. Unless I have some reason to stay -and

if i can make more money - I can sell more goods to customers that need them.

Encourages better preparedness/stocking for futureHow often do people buy generators? But shopkeepers still keep a few for sale, wasting valuable shop

space. Why? Because when they are needed - they can get a good price for them.

People get what they wantNobody ever is forced into a free market transaction. Don't like the price - don't buy it. If enough

people agree with you, what happens to the price?

SAVES LIVESShopkeepers staying open (and shipping in more goods) saves lives in a crisis and prevents shortages.

If you know prices are going to increase - you buy more sensibly for the future.

Answer the following question (and/or discuss with neighbor)

• Why do we work? –Why do people do jobs they don’t like?

• Can you name any jobs in the US that people are forced to do?

Who would like to work at McDonalds?

“Mickey D’s”

It’s actually a pretty impressive company - almost all of the McDonald's executives started at the bottom.

• And a huge percentage of people who start at the bottom will become managers later - and make pretty good money

• Other benefits?

I, Pencil (1958 essay)

• “I am simple, yet not a single person on the face of this earth knows how to make me.”

I, Pencil (The Original “I am Legend”)

Simple? Yet, not a single person on the face of this earth knows how to make me.

This sounds fantastic, doesn't it? Especially when it is realized that there are about one and one-half billion of my kind produced in the U.S.A. each year.

Just wood, lacquer, printed labeling, graphite lead, metal, and an eraser.

But hundreds/thousands/millions of people are involved in the creation of that pencil, and not a single one knows or could replicate the whole process.

Wood – chopped in CA by saws (who made them, who mined the iron, made the steel), shipped by truck (gas, steel, rubber, etc.)

Lacquer (do you even know what goes into lacquer? 7 different coats)

Adam Smith’s “The Invisible Hand”• By preferring the support of domestic to that

of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.

Reasons for Trade

• Comparative Advantage • Economies of Scale

Comparative Advantage • Comparative advantage is not absolute

advantage. • Absolute advantage is the ability to produce

something at the lowest absolute cost. (be the best)

• Comparative advantage is the ability to produce something at the lowest opportunity cost.

• http://www.youtube.com/watch?v=U12yZXBmQmY

A person has a comparative advantage at producing something if he can produce it at lower cost than anyone else.

Having a comparative advantage is not the same as being the best at something. In fact, someone can be completely unskilled at doing something, yet still have a comparative advantage at doing it! How can that happen?

First, let's get some more vocabulary:

Someone who is the best at doing something is said to have an absolute advantage. Michael Jordan has an absolute advantage at basketball. For all I know, Michael Jordan may also be the fastest typist in the world, giving him an absolute advantage at typing, too. Since he's better at typing than you, can't he type more cheaply than you? That is, if someone has an absolute advantage in something, doesn't he automatically have a comparative advantage in it?

The answer is no! If Jordan takes time out from shooting hoops to do all his own typing, he sacrifices the large income he earns from entertaining fans of basketball. If, instead, his secretary does the typing, the secretary gives up an alternative secretarial job—or perhaps a much lower salary playing basketball. That is, the secretary is the lower-cost typist. The secretary, not Michael Jordan, has the comparative advantage at typing! The trick to understanding comparative advantage is in the phrase "lower cost." What it costs someone to produce something is the opportunity cost—the value of what is given up. Someone may have an absolute advantage at producing every single thing, but he has a comparative advantage at many fewer things, and probably only one or two things. (In Jordan's case, both basketball and also as an endorser of Nike.)

Amazingly, everyone always has a comparative advantage at something. Let's look at another example. Suppose you and your roommate want to clean the house and cook a magnificent Chicken Kiev dinner for your friends one night. The easy case is when you are each better at one activity. If you are an accomplished chef, while your roommate doesn't know the range from the oven; and if after you vacuum the carpet the dust bunnies have shifted from under the sofa to under the coffee table, while your roommate can vacuum, dust, and polish the silverware faster than you can unwrap the vacuum-cleaner cord, then you and your roommate will each be better off if you cook and your roommate cleans. It's easy to see that you each have a comparative advantage in one activity because you each have an absolute advantage in one activity.

But what if your roommate is a veritable Martha Stewart, able to cook and clean faster and better than you? How can you earn your keep toward this joint dinner? The answer is to look not at her absolute advantage, but at your opportunity costs. If her ability to cook is much greater than yours but her ability to clean is only a little better than yours, then you will both be better off if she cooks while you clean. That is, if you are the less expensive cleaner, you should clean. Even though she has an absolute advantage at everything, you still each have different comparative advantages.

The moral is this: To find people's comparative advantages, do not compare their absolute

advantages. Compare their opportunity costs.

The magic of comparative advantage is that everyone has a comparative advantage at producing something. The upshot is quite extraordinary: Everyone stands to gain from trade. Even those who are disadvantaged at every task still have something valuable to offer. Those who have natural or learned absolute advantages can do even better for themselves by focusing on those skills and buying other goods and services from those who produce them at comparatively low cost.

(Source of example- Library of Economics and Libert)

Opportunity cost

• Superman should NEVER rescue a kitten!

• Why?

Economies of Scale• Some industries, such as shipbuilding, are only

efficient at very large scales.• Things get cheaper/more efficient (per unit)

as they become bigger (up to a point).

Why is this unlikely?

Answer/discuss with neighborWhy do nations trade?

• Why don’t nations make everything themselves?

• Wouldn’t that be safer and more efficient (fewer transportation costs, etc.)?

Autarky

• Japanese grass shirts (cost of silk and materials is high, no imports during the time of near autarky)

Should we have free trade?

• Should all goods be traded freely between nations?

• Should any goods/services/industries be protected in the United States? – Why/why not?

Bibliography

• http://research.stlouisfed.org/econ/cneely/trade/trade.ppt

• http://www.econlib.org/library/Essays/rdPncl1.html

• http://blogs.babble.com/family-style/2011/04/18/because-you-never-outgrow-legos/