Leah Marcal

● Education:
♦ B.A. in Economics –UCSC
♦ M.S. and PhD in Economics –UW Madison
● Background:
♦ Bass Lake
● Teaching Experience:
♦ ECON 160, 310, and 406 & BUS 302

Copyright © 2006 South-Western/Thomson Learning. All rights reserved.

Leah Marcal (cont.)

● Research:
♦ College Assessment Director
■Employer, alumni, and student satisfaction surveys
■Returns to college education
● Interests:
♦ Hiking
♦ Texas Hold’em

Copyright © 2006 South-Western/Thomson Learning. All rights reserved.

Your Introductions:

● Name
● Major
● Employment
● Favorite movie

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 Syllabus

● Preparation:
♦ Strong working knowledge of high school
algebra and geometry
● Textbook:
♦ Baumol and Blinder, Microeconomics:
Principles and Policy, 11th edition (2009)

Copyright © 2006 South-Western/Thomson Learning. All rights reserved.

 Syllabus (cont.)

● Review:
♦ Class website:
http://www.csun.edu/~lem50734/
■PPT slides for each lecture
■Answers to selected questions at the end of each
chapter
■Online practice quizzes

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 Syllabus (cont.)

● Assessment:
♦ In-class quizzes (10%)
■Drop lowest score
♦ Midterm (40%)
♦ Final (50%)
■Contain T/F, multiple choice, and essay questions
■No make-up quizzes or exams

Copyright © 2006 South-Western/Thomson Learning. All rights reserved.

 Syllabus (cont.)

● Office Hours:
♦ JH 4250 on Tues. and Wed. 4:30 to 5:30; or by
appointment
♦ Email your questions: leah.marcal@csun.edu
● Classes:
♦ 13 meetings: 11 lectures and 2 exams
♦ 1 chapter covered per day

Copyright © 2006 South-Western/Thomson Learning. All rights reserved.

Date Topic Chapter
01/04 Scarcity and Cost 3
01/05 Supply and Demand 4
01/06 Consumer Choice and Market Demand 5
01/07 Demand and Elasticity 6
01/08 Production and Cost 7
01/09 Output, Price, and Profit 8
01/11 Midterm Exam ---
01/12 Perfect Competition 10
01/13 Monopoly 11
01/14 Between Competition and Monopoly 12
01/15 Price System and Free Markets 14
01/16 International Trade 22
01/17 Final Exam ---
 1

The Fundamental
Economic Problem:
Scarcity and Choice
 Scarcity and Choice

● Central problem in economics: how to chose

among competing alternatives given the limited
resources of decision makers

Decision-maker Alternatives
CA state gov. Roads or schools
Fed gov. Defense or SSI
Households New car or trip
Firms PCs or office furniture
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 Scarcity and Choice

● All resources are scarce, so a decision to

have more of one thing is a decision to have
less of something else.
● Cost of any decision is its opportunity cost –
value of the next best alternative that is
given up.
● What is the cost of producing one car?

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 Scarcity and Choice

● Goods are scarce because the resources

(land, labor, capital, and fuel) that are used
to produce goods are scarce.
● How does society decide whether cars or
refrigerators are produced?
♦ Forces of S and D

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Opportunity Cost and Money
Cost
● Opportunity cost is closely related to money
cost if markets function properly
♦ E.g., D for steel → high P for steel → high
opportunity cost of car → high P for cars
● No explicit P for some valuable resources –
like time
● TC = money cost + opportunity cost
♦ E.g., college education
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 Scarcity and Choice for a
Single Firm
● Production Possibilities Frontier
♦ PPF = graph showing different combinations
of output for a fixed number of inputs
♦ More of one good  less of another
♦ Illustrates opportunity costs in production

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TABLE 1. PPF for a Farmer

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FIGURE 1. PPF for a Farmer

A
Soybeans

40 Unattainable
region
B
30 Attainable
region C
20
D
10
0 E
10 20 30 38 52 60 65
Wheat

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Features of the PPF

● Negatively sloped
♦ ↑ Q wheat by moving resources out of soybean
production and into wheat production
● Slope = opportunity cost
● Bowed outward
♦ ↑ Opportunity cost of wheat as ↑ wheat production
■ Why? Inputs tend to be specialized. E.g., some land may
be better suited for wheat vs. soybean production.

Copyright
Copyright©© 2006 South-Western/Thomson Learning. All rights reserved.
Principle of Increasing Costs

♦ Principle of increasing costs:

 production of one good 
 opportunity cost of producing another unit
♦ PPF is bowed outward
♦ Reason: inputs tend to be specialized
■If not, then PPF is a straight line

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 FIGURE 2. PPF without Specialized
Resources
50

A
40
Black Shoes

B
30

C
20

D
10

0
10 20 30 40 50

Brown Shoes
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Principle of Increasing Costs

● Straight line PPF:

♦ Constant opportunity costs
♦ Inputs are not specialized
■Above, inputs used to produce black shoes are
equally well suited to produce brown shoes

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 Scarcity and Choice for the
Entire Society
● Use PPFs to show scarcity and choice for the
entire economy
● PPF for a country depends on:
♦ Resources
♦ Skills of its labor force
♦ Technology
♦ Willingness to work
♦ Past investments in factories, educ., and research

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FIGURE 3. PPF for Entire Economy

700
B

Thousands of Automobiles per Year

600

D
500

E
400

300

F
200

100

0 C
100 200 300 400 500

Missiles per Year

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 Scarcity and Choice for the
Entire Society
● B → D: give up 150,000 cars to get 300
missiles.
● F → C: give up 200,000 cars to get 50
missiles.
● ↑ Opportunity cost of military strength as
more resources that are suited for car prod.
are forced into missile prod.

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 Economic Growth

● ↑resources or technology shifts the PPF outward

● Factors that promote growth:
♦ ↑ labor skills
♦ Technological advances
♦ Investments in K –robots, computers, and factories
● Grow faster by investing in educ., R&D, and new
factories and equipment

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 Economic Growth

● Resources can be used to produce C goods

or K goods
♦ E.g., steel used to produce cars instead of
assembly lines; workers used to produce
clothing instead of attending school.
● Investment in K goods shifts out the PPF
● What is the cost of economic growth?

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Figure 4. Growth in the U.S. and Asia

F g
Next year’s
N production Next year’s
A production
possibilities possibilities

Consumption Goods
Consumption Goods

f This year’s
production
possibilities

This year’s
production
possibilities
B

F G f g

Capital Goods Capital Goods

(a) United States (b) Asia
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 Efficiency

● Efficiency = no waste
● Economy produces max. output using
available resources
● Efficiency and the PPF
♦ Any point on the boundary is efficient
■Efficiency does not indicate which point is best
♦ Any point on the interior is inefficient

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FIGURE 5. PPF and Efficiency

700 Point A is inefficient

B

Thousands of Automobiles per Year

600

D
500

A E
400

300

F
200

100

0 C
100 200 300 400 500

Missiles per Year

Copyright© 2006 South-Western/Thomson Learning. All rights reserved.
 Efficiency

● Sources of inefficiency:
♦ Unemployment
♦ Inputs assigned to the wrong task
♦ Discrimination

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 Three Coordination Tasks of
Any Economy
1. How to utilize resources efficiently –get
on the boundary of the PPF
2. What combinations of goods to produce –
which point on the PPF
3. How much of each good to distribute to
each person –who gets what
♦ Goals can be accomplished by a central planner or a
price system
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 Efficiency in Production

● Division of Labor: each person specializes in the

production of a particular good or task
● Adam Smith in Wealth of Nations (1776)
describes specialization in a pin factory:
♦ “One man draws out the wire, another straightens it, a
third cuts it, a fourth points it, a fifth grinds it at the
top for receiving the head; to make the head requires 2
or 3 distinct operations; to whiten the pins is another;
it is even a trade by itself to put them into the paper.”

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 Efficiency in Production

● Smith observed that this division of labor

increased the productivity of the workers as
a whole stating:
■“I have seen a manufacturing plant where 10 men
were employed. Those 10 men could make among
them upwards of 48,000 pins a day. But if they had
all worked separately and independently, they
certainly could not each of them have made 20,
perhaps not 1 pin in a day.”

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 Efficiency in Production

● Imagine a world without specialization

♦ You would have to produce all of your own
clothing, food, shelter, and transportation.
● So what should you specialize in?
■Doing what you do best and trading with others

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 Efficiency in Production

● Example: a world-class neurosurgeon is the

best car mechanic in Los Angeles.
♦ Should she repair her own car?
♦ What is the opportunity cost of having her
spend one hour repairing her car?

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 Comparative Advantage

● Principle of comparative advantage is illustrated

here.
● Neurosurgeon specializes in surgery despite her
advantage as a car mechanic because she has an
even greater advantage as a surgeon.
● She suffers some loss by letting a lesser skilled
mechanic repair her car. Yet, she makes up for
that loss by the income gained from surgery.

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 Comparative Advantage

● Comparative advantage applies to countries.

● Standard of living in the U.S. would be
lower if it tried to produce everything itself.
♦ Example: U.S. could produce winter roses and
computer software.
♦ U.S. is better off specializing in software and
buying winter roses from Latin America where
the opportunity cost of roses is lower.
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 Voluntary Exchange

● Specialization leads to exchange

♦ Prior to industrial revolution, workers produced what
they consumed. After, workers who produced shoes
needed to trade with others who produced food or
clothing.
● Voluntary exchange between 2 parties must make
both parties better off.
♦ Even though no additional goods are created in the act
of trading, welfare of society is improved. Individuals
can trade what they have for what they want.

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 Voluntary Exchange

● Why don’t we trade goods for goods? Why do

we need money?
■ Search costs
● Recall: focus is efficiency in production.
Sidetracked: division of labor and specialization
→ comparative advantage → exchange
● Firms are also encouraged by the profit motive
not to waste inputs → efficiency in production

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 Production Decisions

● Task (2) –which point on the PPF –is

accomplished by the forces of S and D.
♦ Example: if consumers want more fuel-
efficient cars, automakers must produce
smaller, more efficient cars.

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 Distribution of Goods
● Task (3) –who gets what –is accomplished by
consumers purchasing what they like best given
their income.
● Ability to purchase goods is not equally
distributed.
♦ Highly skilled workers and individuals who own
valuable resources can sell their labor or resources at
high prices giving them greater incomes.
● Should we redistribute income so that everyone
can consume the same amount of goods and
services?
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