Microeconomics
Individuals and “firms” (businesses)
Decision-making
Equilibrium
Game Theory
“Law of Unintended Consequences”
Goverment Actions
Regulations
Price floors
Price ceilings
Public goods
Externalities
Macroeconomics
Look at the whole economy:
Equations
$$C+I+G+NX$$
$$M\dot{} + V\dot{} = P\dot{} + Y\dot{}$$
Economic Issues
- Unemployment
- Inflation
- Recessions/Depressions
Economic Policies
- Taxation
- Central Banks
- Economic Stimulus
Normative vs. Positive
| Attribute | Positive | Normative |
|---|---|---|
| Meaning | What does happen/will happen. Uses facts and data. | What should happen. |
| Goal | You want $X$? Oh, $Y$ does that. | Suggest policies based on opinion and judgment. |
| Nature | Factual and descriptive. Data -> Conclusions. | Prescriptive. Conclusions -> Data. |
| Type of Argument | Logic and facts. | Personal values and opinions. |
| Testable? | Yes. | No — statements cannot be checked or tested. |
| When to use it | To understand facts to make judgments. | To gives advice based on the facts from positive economics. |
Examples
| Positive | Normative |
|---|---|
| When income goes down, demand for generic food goes up | The government should increase the minimum wage to reduce poverty. |
| Higher interest rates will reduce house prices. | Unemployment is worse than inflation |
| If the price of petroleum goes down, people will drive more | Low taxes are better for the economy |
The Problem of Scarcity
Economic resources are used to produce goods and services. There are many types:
- Land
- Raw materials, natural resources
- Labor
- Workers, the effort to do something
- Human Capital
- Experience, education, skills, etc.
- Physical Capital
- Buildings, equipment, factories, machinery, etc.
- Ideas
- technology, etc.
Time
What is Scarcity
There is not enough of something to satisfy all who want it.
Opportunity Cost
Scarcity causes Opportunity Cost.
Example
You have two options:
- See a movie (
$10); - Eat pizza (
$10).
You have $10.
If you see a movie, you cannot eat pizza. If you eat pizza, you cannot see a movie. The opportunity cost of seeing a movie is not eating pizza. The opportunity cost of eating pizza is not seeing a movie.
There’s no such thing as a free lunch.
The price of anything is the amount of life you exchange for it.
~ Henry David Thoreau
Comparative Advantage
This example illustrates comparative advantage using Production Possibility Frontiers (PPFs) for two countries: Japan and Vietnam.
Production Capabilities
| Country | Computers/hour | Shirts/hour | Opportunity Cost |
|---|---|---|---|
| Japan | 1 | 1 | 1 computer = 1 shirt |
| Vietnam | 1 | 6 | 1 computer = 6 shirts |
In 12 hours, Japan can make 0 shirts and 12 computers, 6 shirts and 6 computers, 12 shirts and 0 computers, etc.:
| Japan’s Opportunity Cost Over 12 Hours |
|---|
| Shirts | Computers |
|---|---|
| 0 | 12 |
| 1 | 11 |
| 2 | 10 |
| 3 | 9 |
| 4 | 8 |
| 5 | 7 |
| 6 | 6 |
| 7 | 5 |
| 8 | 4 |
| 9 | 3 |
| 10 | 2 |
| 11 | 1 |
| 12 | 0 |
| Country | Computers | Shirts | Opportunity Cost |
|---|---|---|---|
| Japan | 12 max | 12 max | 1 computer = 1 shirt |
| Vietnam | 1 max | 6 max | 1 computer = 6 shirts |
Example 24 Hours
Let’s say Japan produces 12 computers and 12 shirts and Vietnam produces 1 computer and 6 shirts. In total, that is 13 computers and 18 shirts.
| Country | Computers | Shirts |
|---|---|---|
| Japan | 12 | 12 |
| Vietnam | 1 | 6 |
Specialization
Japan is better at making computers, so if Japan focuses and spends more time making computers and less time making shirts, and Vietnam spends all its time making shirts, the total amount of computers and shirts goes up.
Example:
| Country | Computers | Shirts |
|---|---|---|
| Japan | 14 | 10 |
| Vietnam | 0 | 12 |
With specialization: 14 computers and 22 shirts.
What about trade?
What if Japan trades 1 computer for three shirts?
| Country | Computers | Shirts |
|---|---|---|
| Japan | 13 | 13 |
| Vietnam | 1 | 9 |
Now both countries have more than they had before.