Principles of Microeconomics – Mr. Lilly

Topic 1 Skills

1.        Given an example of an economic interaction, be able to identify whether that interaction took place in a market or within an organization or group. (Taylor p. 3 + class discussion on slide 1-3.)   
Economic Interactions
You get a haircut.

You buy the books for this class.

You agree to wash your roommate’s car once a week if he’ll help you with your economics homework.( organization or group)

You work part time.

You receive a scholarship from De Anza college.

Your dad sends you $100 for your birthday( organization or group)

2.        The definition of opportunity cost (pp. 4-5 Taylor + slide 1-6). (P4-5)

“The value of the best alternative precluded by the current choice.”

•          The opportunity cost of taking this class is the value of the best alternative thing you could have done with the time it will take you to complete this class.

•          The opportunity cost of buying a latte at Starbucks is the value of the best alternative thing you could have purchased with the $2.40.

•          The value of the next-best forgone alternative that was not chosen because something else was chosen.

3.        Understand the statement “An opportunity cost occurs every time there is a choice.” (Book only: Taylor p. 5.)

(p.5) (No explicit explanation.)

4.        Understand key element of economics #2: There is no such thing as a free lunch.  Be able to pick the real definition out of a lineup. Understand the Taylor book’s definition of scarcity and be able to recognize the same or a similar definition.  Understand the close relationship between scarcity and key element of economics #2.  Understand the Taylor book’s definition of economics.  (Slide 1-4 + Taylor p. 3)

(p.3) scarcity = the situation in which the quantity of recources in insufficient to meet all wants.

(p.3) economics is the studty of how people deal with scarcity.

What is Economics? (class discussion on slide 1-3)

•           It is a social science.

•          It studies human behavior.

•          It studies how people interact in “markets.”

•          A “market” is an abstract concept.

•          Economics studies human behavior in economic interactions.

5.        Understand each of the 3 reasons voluntary exchange promotes economic progress:  better allocation, specialization, and scale.  Understand the meaning of the expressions “gains from trade” and “division of labor.”   (Taylor pp. 5-6 + slides 1-7 to 1-11).

  (p.6) (gains from trade is related to specialization, division of labor and comparative advantages)

“Voluntary exchange promotes economic progress.”

There are three major reasons for this:

1.        Trade channels goods and services to those who value them most.

2.        Exchange permits trading partners to gain from specializing in the production of those things they do best.

3.        Voluntary exchange permits us to realize gains derived from cooperative effort, division of labor, and the adoption of large-scale production methods.

Gain from Trade #3:  Cooperative effort, Division of Labor, and Bulk Production

1.        Cooperative effort: Two men can replace the roof on a house in less than half the time it would take one man.

2.        Division of labor: See Adam Smith’s pin factory example on pages 9-10 of Gwartney and Stroup.

3.        Bulk Production: Buying and manufacturing in large batches is often cheaper.

6.        Given a list of the 3 reasons voluntary exchange promotes economic progress, be able to identify the one that is related to the law of comparative advantage.  (Lecture only: Slide 1-8).

(p.7) comparative advantage = a situation in which a person or group can produce one good at a lower opportunity cost than another person or group.

7.        Be able to pick the “law of comparative advantage” out of a lineup.  Know what happens when the law of comparative advantage is not followed. (Lecture only: Slide 1-8).

(not found) (productivities go down.)

8.        Given the chart like the one on page 6 of Taylor showing the output of two products possible by each of two workers (on page 6 it is Emily and Johann,) be able to identify what law or principle of economics it illustrates. (Lecture only: slide 1-9.)

9.        (Specialization)

10.     Know the definition of the production possibilities curve.  Be able to explain what changes if the economy moves from one point on the production possibilities curve to an adjacent point.  Know how to read a production possibilities table such as Table 1.1 on page 8 of the Taylor textbook.   Be able to identify and explain the 3 types of points on a PPF graph: attainable but inefficient, attainable and efficient, and unattainable. (Taylor pp. 8-10 + slide 1-12.)

Production possibilities curve = a curve showing the maximum combinations of production of two goods that are possible, given the economy’s resources.

11.     Understand the law of increasing opportunity cost.  Understand why the concavity of the PPF toward the origin (the book calls it “bowed out from the origin”) illustrates the law of increasing opportunity cost, NOT key element of economics #2.  Understand why it is the downward slope of the production possibilities frontier that illustrates key element of economics #2.  (Taylor pp. 8-9 + slide 1-13 + instructor’s notes on slide 1-11.)

The Law of Increasing Opportunity Cost

“As we expand the production of any good toward 100%, we will face higher and higher opportunity costs.”

•          If we’re at point A on the PPF (producing nothing but computers,) the first few hundred movies we produce will be produced by those people who are really good at movie production and/or really bad at making computers.

•          As we approach 100% movie production (point F,) we are forced to employ resources (including people) that are much better suited to computer production.

•          (down slope illustrates “there is no such thing as a free lunch” because when you have more of one thing, you have less of another.)

12.     Understand figure 1.4 on page 12 of the Taylor text.  (Book only.) (Understood)

13.     Know the answers to the 4 questions on slide 1-15.  Understand major source of economic progress #1: private ownership (also known as property rights.)  (Taylor page 14 + slide 1-17 + class discussion on slide 1-15 + perhaps most important: Gwartney and Stroup, pp. 32-34.)

•(not found)

14.     Know and understand the 3 basic questions any economy must answer.  (Book only: Taylor p. 13).

(p.13) What? How? For Whom?

15.     Know the 2 components of the role of government on which all economists agree. (Taylor p. 16 + Gwartney and Stroup, pp. 70-73 + slide 1-19.)

When government protects the rights of individuals and supplies goods that cannot be provided through markets, it helps promote economic progress.”

•    These are the two functions of government on which all economists agree.

•    Many economists add a third function: to correct market failures.

•    We will return to the role of government at the end of the course.

(p.16)Market failure = any situation in which the market does not lead to an efficient economic outcome and in which there is a potential role for government.

(p.16)government failure = a situation in which the government makes things worse than the market, even though there may be market failure.