ECON Designed by Amy McGuire, B-books, Ltd. McEachern   2008-2009 2 CHAPTER Economic Tools and Economic Systems Macro
Choice and Opportunity Cost LO 1 <ul><li>Scarcity </li></ul><ul><li>Make a choice </li></ul><ul><ul><li>Pass up another op...
LO 1 Case Study The Opportunity Cost of College <ul><li>Value of best alternative forgone </li></ul><ul><ul><li>Forgone in...
Opportunity Cost LO 1 <ul><li>Opportunity cost is subjective </li></ul><ul><ul><li>‘ the road not taken’ </li></ul></ul><u...
Sunk Cost and Choice LO 1 <ul><li>Sunk cost </li></ul><ul><ul><li>Incurred cost </li></ul></ul><ul><ul><li>Cannot be recov...
Law of Comparative  Advantage LO 2 <ul><li>Specialize in the task that you do better </li></ul><ul><li>Law of comparative ...
Specialization and  Exchange LO 2 <ul><li>Barter </li></ul><ul><ul><li>Trade products for other products </li></ul></ul><u...
Division of Labor LO 2 <ul><li>Division of labor </li></ul><ul><ul><li>Specialization; Increased productivity </li></ul></...
Efficiency and the PPF LO 3 <ul><li>Production Possibilities Frontier (PPF) </li></ul><ul><li>Assumptions </li></ul><ul><u...
Efficiency and the PPF LO 3 <ul><li>PPF </li></ul><ul><ul><li>Possible combinations of  </li></ul></ul><ul><ul><li>Consume...
LO 3 Exhibit 1 PPF (AF): Economy uses all resources and technology efficiently PPF: bowed out; law of increasing opportuni...
The Shape of the PPF LO 3 <ul><li>Movement down along PPF </li></ul><ul><ul><li>Give up some consumer goods to get more ca...
What Can Shift the PPF? LO 3 <ul><li>Economic growth </li></ul><ul><ul><li>Expansion in the economy’s PPF </li></ul></ul><...
What Can Shift the PPF? LO 3 <ul><li>Technological change </li></ul><ul><ul><li>Employs resources more efficiently </li></...
Exhibit 2(a), (b) LO 3 (a) Increase in available resources (b) Decrease in available resources <ul><li>Outward shift of PP...
Exhibit 2(c), (d) LO 3 Shifts of the Economy’s Production Possibilities Frontier (d) Increase in resources or technologica...
What We Learn from the PPF? LO 3 <ul><li>Efficiency </li></ul><ul><li>Scarcity </li></ul><ul><ul><li>Opportunity cost </li...
Economic Systems LO 4 <ul><li>Three questions </li></ul><ul><ul><li>What? </li></ul></ul><ul><ul><li>How? </li></ul></ul><...
Economic Systems LO 4 <ul><li>Criteria </li></ul><ul><ul><li>Ownership of resources </li></ul></ul><ul><ul><li>Allocation ...
Pure Capitalism LO 4 <ul><li>Private property rights </li></ul><ul><li>Unrestricted markets </li></ul><ul><ul><li>Answer t...
Pure Capitalism: Flaws LO 4 <ul><li>No central authority </li></ul><ul><li>People with no resources could starve </li></ul...
Pure Command System LO 4 <ul><li>Public/communal ownership of property </li></ul><ul><li>Government planners </li></ul><ul...
Pure Command System: Flaws LO 4 <ul><li>Resources </li></ul><ul><ul><li>Used inefficiently </li></ul></ul><ul><ul><li>Wast...
Mixed and Transitional Economies LO 4 <ul><li>Increasing role of government </li></ul><ul><ul><li>In capitalist economies ...
LO 3 Case Study <ul><li>“ Ease of doing business” </li></ul><ul><li>Friendly business climate </li></ul><ul><ul><li>High s...
Exhibit 3 LO 3 Best 10 and Worst 10 Among 175 Countries Based on Ease of Doing Business, According to the World Bank Best ...
LO 3 Case Study Rules of the Game and Economic Development <ul><li>Sell an imported product </li></ul><ul><ul><li>Denmark ...
LO 3 Case Study <ul><li>Business taxes </li></ul><ul><ul><li>Belarus </li></ul></ul><ul><ul><ul><li>11 taxes; 122% of prof...
LO 3 Case Study <ul><li>Effectiveness and reliability of courts </li></ul><ul><li>Collect a $1,000 debt </li></ul><ul><ul>...
LO 3 Case Study <ul><li>Possible explanations for bad business environment </li></ul><ul><ul><li>Bad administrative system...
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Econ Macro Ch02

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  • Chapter 2 Economic Tools and Economics Systems
  • Chapter 2 Economic Tools and Economics Systems
  • Chapter 2 Economic Tools and Economics Systems
  • Chapter 2 Economic Tools and Economics Systems
  • Chapter 2 Economic Tools and Economics Systems
  • Chapter 2 Economic Tools and Economics Systems
  • Chapter 2 Economic Tools and Economics Systems
  • Chapter 2 Economic Tools and Economics Systems
  • Chapter 2 Economic Tools and Economics Systems
  • Chapter 2 Economic Tools and Economics Systems
  • Chapter 2 Economic Tools and Economics Systems
  • Chapter 2 Economic Tools and Economics Systems
  • Chapter 2 Economic Tools and Economics Systems
  • Chapter 2 Economic Tools and Economics Systems
  • Chapter 2 Economic Tools and Economics Systems
  • Chapter 2 Economic Tools and Economics Systems
  • Chapter 2 Economic Tools and Economics Systems
  • Chapter 2 Economic Tools and Economics Systems
  • Chapter 2 Economic Tools and Economics Systems
  • Chapter 2 Economic Tools and Economics Systems
  • Chapter 2 Economic Tools and Economics Systems
  • Chapter 2 Economic Tools and Economics Systems
  • Chapter 2 Economic Tools and Economics Systems
  • Chapter 2 Economic Tools and Economics Systems
  • Chapter 2 Economic Tools and Economics Systems
  • Chapter 2 Economic Tools and Economics Systems
  • Chapter 2 Economic Tools and Economics Systems
  • Chapter 2 Economic Tools and Economics Systems
  • Chapter 2 Economic Tools and Economics Systems
  • Chapter 2 Economic Tools and Economics Systems
  • Econ Macro Ch02

    1. 1. ECON Designed by Amy McGuire, B-books, Ltd. McEachern 2008-2009 2 CHAPTER Economic Tools and Economic Systems Macro
    2. 2. Choice and Opportunity Cost LO 1 <ul><li>Scarcity </li></ul><ul><li>Make a choice </li></ul><ul><ul><li>Pass up another opportunity </li></ul></ul><ul><li>Opportunity cost </li></ul><ul><ul><li>The value of the best alternative forgone </li></ul></ul><ul><ul><li>Opportunity lost </li></ul></ul><ul><ul><li>Monetary aspect </li></ul></ul><ul><ul><li>Non-monetary aspect </li></ul></ul>
    3. 3. LO 1 Case Study The Opportunity Cost of College <ul><li>Value of best alternative forgone </li></ul><ul><ul><li>Forgone income (full-time job; $20,000) </li></ul></ul><ul><ul><li>Minus income earned as a student (part-time work: $10,000) </li></ul></ul><ul><li>Plus direct cost of college </li></ul><ul><ul><li>Tuition, fees, books ($6,000) </li></ul></ul><ul><li>$20,000 - $10,000 + $6,000 = $16,000 </li></ul><ul><ul><li>Not included: room, board, personal expenses </li></ul></ul>
    4. 4. Opportunity Cost LO 1 <ul><li>Opportunity cost is subjective </li></ul><ul><ul><li>‘ the road not taken’ </li></ul></ul><ul><li>Calculating opportunity cost </li></ul><ul><ul><li>Requires time and information </li></ul></ul><ul><li>Time: the ultimate constraint </li></ul><ul><li>Opportunity cost varies with circumstance </li></ul><ul><ul><li>Depends on the alternative </li></ul></ul>
    5. 5. Sunk Cost and Choice LO 1 <ul><li>Sunk cost </li></ul><ul><ul><li>Incurred cost </li></ul></ul><ul><ul><li>Cannot be recovered </li></ul></ul><ul><ul><li>Ignored when making economic choices </li></ul></ul><ul><li>Economic decision makers </li></ul><ul><ul><li>Relevant: costs affected by the choice </li></ul></ul><ul><ul><li>Irrelevant: sunk costs </li></ul></ul>
    6. 6. Law of Comparative Advantage LO 2 <ul><li>Specialize in the task that you do better </li></ul><ul><li>Law of comparative advantage </li></ul><ul><ul><li>Specialize in producing a good IF </li></ul></ul><ul><ul><li>Lower opportunity cost of producing it </li></ul></ul><ul><li>Specialization and exchange </li></ul><ul><ul><li>Better off </li></ul></ul><ul><li>Absolute advantage </li></ul><ul><ul><li>Use fewer resources </li></ul></ul>
    7. 7. Specialization and Exchange LO 2 <ul><li>Barter </li></ul><ul><ul><li>Trade products for other products </li></ul></ul><ul><ul><li>Simple economies </li></ul></ul><ul><ul><ul><li>Few goods </li></ul></ul></ul><ul><ul><ul><li>Little specialization </li></ul></ul></ul><ul><li>Money </li></ul><ul><ul><li>Medium of exchange </li></ul></ul><ul><ul><li>Facilitates exchange </li></ul></ul><ul><ul><li>Greater specialization </li></ul></ul>
    8. 8. Division of Labor LO 2 <ul><li>Division of labor </li></ul><ul><ul><li>Specialization; Increased productivity </li></ul></ul><ul><ul><ul><li>Individual preferences; natural ability </li></ul></ul></ul><ul><ul><ul><li>Experience </li></ul></ul></ul><ul><ul><ul><li>No need to shift between tasks </li></ul></ul></ul><ul><ul><ul><li>Laborsaving machinery </li></ul></ul></ul><ul><ul><li>Downside: </li></ul></ul><ul><ul><ul><li>Repetitive, tedious </li></ul></ul></ul><ul><ul><ul><li>Routine tasks - robots </li></ul></ul></ul>
    9. 9. Efficiency and the PPF LO 3 <ul><li>Production Possibilities Frontier (PPF) </li></ul><ul><li>Assumptions </li></ul><ul><ul><li>Output: consumer and capital goods </li></ul></ul><ul><ul><li>Productions: 1 year </li></ul></ul><ul><ul><li>Fixed resources (quantity, quality) </li></ul></ul><ul><ul><li>Fixed technology </li></ul></ul><ul><ul><li>Fixed ‘rules of the game’ </li></ul></ul><ul><li>Resources – scarce for the economy </li></ul><ul><li>Economy’s production options </li></ul>
    10. 10. Efficiency and the PPF LO 3 <ul><li>PPF </li></ul><ul><ul><li>Possible combinations of </li></ul></ul><ul><ul><li>Consumer and Capital goods that </li></ul></ul><ul><ul><li>Can be produced using </li></ul></ul><ul><ul><li>All resources efficiently </li></ul></ul><ul><li>Inefficient combinations </li></ul><ul><li>Unattainable combinations </li></ul>
    11. 11. LO 3 Exhibit 1 PPF (AF): Economy uses all resources and technology efficiently PPF: bowed out; law of increasing opportunity cost Inefficient: inside PPF Unattainable: outside PPF The Economy’s Production Possibilities Frontier 10 20 30 34 43 48 50 Consumer goods (millions of units per year) 10 0 50 40 30 20 Capital goods (millions of units per year) A C D E F B U Unattainable I Inefficient
    12. 12. The Shape of the PPF LO 3 <ul><li>Movement down along PPF </li></ul><ul><ul><li>Give up some consumer goods to get more capital goods </li></ul></ul><ul><li>Bowed-out shape </li></ul><ul><li>Law of increasing opportunity costs </li></ul><ul><li>Slope of PPF </li></ul><ul><ul><li>Opportunity cost of 1 unit capital good </li></ul></ul>
    13. 13. What Can Shift the PPF? LO 3 <ul><li>Economic growth </li></ul><ul><ul><li>Expansion in the economy’s PPF </li></ul></ul><ul><li>Changes in resource availability </li></ul><ul><ul><li>Outward shift of PPF – increase in: </li></ul></ul><ul><ul><ul><li>Size, health of labor force </li></ul></ul></ul><ul><ul><ul><li>Skills of labor force </li></ul></ul></ul><ul><ul><ul><li>Availability of other resources </li></ul></ul></ul><ul><li>Increases in capital stock </li></ul><ul><ul><li>More output; outward shift of PPF </li></ul></ul>
    14. 14. What Can Shift the PPF? LO 3 <ul><li>Technological change </li></ul><ul><ul><li>Employs resources more efficiently </li></ul></ul><ul><ul><li>Outward shift of PPF </li></ul></ul><ul><li>Improvements in the rules of the game </li></ul><ul><ul><li>Formal and informal institutions </li></ul></ul><ul><ul><li>Economic growth </li></ul></ul><ul><ul><li>Outward shift of PPF </li></ul></ul>
    15. 15. Exhibit 2(a), (b) LO 3 (a) Increase in available resources (b) Decrease in available resources <ul><li>Outward shift of PPF – increase in available resources; better technology </li></ul><ul><li>- enhanced production of both capital and consumer goods </li></ul>(b) Inward shift of PPF – decrease in available resources - decreased production of both capital and consumer goods Shifts of the Economy’s Production Possibilities Frontier A A’ Consumer goods F’ F Capital goods A A’ Consumer goods F’ F Capital goods
    16. 16. Exhibit 2(c), (d) LO 3 Shifts of the Economy’s Production Possibilities Frontier (d) Increase in resources or technological advance that benefits capital goods (c) Increase in resources or technological advance that benefits consumer goods A A’ F Capital goods A Consumer goods F’ F Capital goods Consumer goods
    17. 17. What We Learn from the PPF? LO 3 <ul><li>Efficiency </li></ul><ul><li>Scarcity </li></ul><ul><ul><li>Opportunity cost </li></ul></ul><ul><ul><li>Law of increasing opportunity cost </li></ul></ul><ul><ul><li>Economic growth </li></ul></ul><ul><li>Choice </li></ul><ul><ul><li>Costs </li></ul></ul><ul><ul><li>Benefits </li></ul></ul>
    18. 18. Economic Systems LO 4 <ul><li>Three questions </li></ul><ul><ul><li>What? </li></ul></ul><ul><ul><li>How? </li></ul></ul><ul><ul><li>For Whom? </li></ul></ul><ul><li>Economic system </li></ul><ul><ul><li>Mechanisms </li></ul></ul><ul><ul><li>Institutions </li></ul></ul><ul><ul><li>Answer the three questions </li></ul></ul>
    19. 19. Economic Systems LO 4 <ul><li>Criteria </li></ul><ul><ul><li>Ownership of resources </li></ul></ul><ul><ul><li>Allocation of resources </li></ul></ul><ul><ul><li>Incentives </li></ul></ul><ul><li>Range from </li></ul><ul><ul><li>Pure capitalism, to </li></ul></ul><ul><ul><li>Pure command system </li></ul></ul>
    20. 20. Pure Capitalism LO 4 <ul><li>Private property rights </li></ul><ul><li>Unrestricted markets </li></ul><ul><ul><li>Answer the three questions </li></ul></ul><ul><ul><li>Resources – most productive use </li></ul></ul><ul><ul><li>Goods and services – most valued </li></ul></ul><ul><ul><li>Voluntary buying and selling </li></ul></ul><ul><li>Adam Smith: “invisible hand” </li></ul>
    21. 21. Pure Capitalism: Flaws LO 4 <ul><li>No central authority </li></ul><ul><li>People with no resources could starve </li></ul><ul><li>Monopoly </li></ul><ul><li>Side effects for people not involved </li></ul><ul><li>No public goods </li></ul>
    22. 22. Pure Command System LO 4 <ul><li>Public/communal ownership of property </li></ul><ul><li>Government planners </li></ul><ul><ul><li>Central plans </li></ul></ul><ul><ul><li>Direct resources </li></ul></ul><ul><ul><li>Coordinate production </li></ul></ul><ul><ul><li>Answer the three questions </li></ul></ul><ul><li>Communism </li></ul>
    23. 23. Pure Command System: Flaws LO 4 <ul><li>Resources </li></ul><ul><ul><li>Used inefficiently </li></ul></ul><ul><ul><li>Wasted (no incentives) </li></ul></ul><ul><li>Preferences of planners </li></ul><ul><li>Limited variety of products </li></ul><ul><li>Less freedom of economic choice </li></ul>
    24. 24. Mixed and Transitional Economies LO 4 <ul><li>Increasing role of government </li></ul><ul><ul><li>In capitalist economies </li></ul></ul><ul><li>Increasing role of markets </li></ul><ul><ul><li>In command economies </li></ul></ul><ul><li>Mixed economies </li></ul><ul><li>Government </li></ul><ul><ul><li>Economic activity </li></ul></ul><ul><ul><li>Regulates the private sector </li></ul></ul><ul><li>Economies based on custom or religion </li></ul>
    25. 25. LO 3 Case Study <ul><li>“ Ease of doing business” </li></ul><ul><li>Friendly business climate </li></ul><ul><ul><li>High standard of living </li></ul></ul><ul><ul><li>Sophisticated economy </li></ul></ul><ul><li>Difficult business climate </li></ul><ul><ul><li>Low standard of living </li></ul></ul><ul><ul><li>Poor economy </li></ul></ul>Rules of the Game and Economic Development
    26. 26. Exhibit 3 LO 3 Best 10 and Worst 10 Among 175 Countries Based on Ease of Doing Business, According to the World Bank Best 10 Worst 10 <ul><li>Singapore </li></ul><ul><li>New Zealand </li></ul><ul><li>United States </li></ul><ul><li>Canada </li></ul><ul><li>Hong Kong </li></ul><ul><li>United Kingdom </li></ul><ul><li>Denmark </li></ul><ul><li>Australia </li></ul><ul><li>Norway </li></ul><ul><li>Ireland </li></ul>166. Burundi 167. Central African Republic 168. Sierra Leone 169. São Tomé and Principe 170. Eritrea 171. Republic of Congo 172. Chad 173. Guinea-Bissau 174. East Timor 175. Democratic Republic of Congo
    27. 27. LO 3 Case Study Rules of the Game and Economic Development <ul><li>Sell an imported product </li></ul><ul><ul><li>Denmark </li></ul></ul><ul><ul><ul><li>3 documents </li></ul></ul></ul><ul><ul><ul><li>1 official signature </li></ul></ul></ul><ul><ul><ul><li>5 days </li></ul></ul></ul><ul><ul><li>Burundi </li></ul></ul><ul><ul><ul><li>19 documents </li></ul></ul></ul><ul><ul><ul><li>55 official signatures </li></ul></ul></ul><ul><ul><ul><li>24 days </li></ul></ul></ul>
    28. 28. LO 3 Case Study <ul><li>Business taxes </li></ul><ul><ul><li>Belarus </li></ul></ul><ul><ul><ul><li>11 taxes; 122% of profit </li></ul></ul></ul><ul><ul><ul><li>113 tax payments to 3 government agencies </li></ul></ul></ul><ul><ul><ul><li>1,188 hours tax preparation </li></ul></ul></ul><ul><ul><li>Hong Kong </li></ul></ul><ul><ul><ul><li>2 taxes; 14% of profit </li></ul></ul></ul><ul><ul><ul><li>1 electronic filing </li></ul></ul></ul><ul><ul><ul><li>80 hours tax preparation </li></ul></ul></ul>Rules of the Game and Economic Development
    29. 29. LO 3 Case Study <ul><li>Effectiveness and reliability of courts </li></ul><ul><li>Collect a $1,000 debt </li></ul><ul><ul><li>East Timor </li></ul></ul><ul><ul><ul><li>$1,800 court and attorney fees </li></ul></ul></ul><ul><ul><ul><li>69 procedures; wait 3 years </li></ul></ul></ul><ul><ul><li>Denmark </li></ul></ul><ul><ul><ul><li>Cost $65 </li></ul></ul></ul><ul><ul><ul><li>15 procedures </li></ul></ul></ul><ul><ul><ul><li>6 months </li></ul></ul></ul>Rules of the Game and Economic Development
    30. 30. LO 3 Case Study <ul><li>Possible explanations for bad business environment </li></ul><ul><ul><li>Bad administrative systems </li></ul></ul><ul><ul><li>Favoritism in governmental jobs </li></ul></ul><ul><ul><li>Corruption </li></ul></ul><ul><ul><li>Bribes </li></ul></ul>Rules of the Game and Economic Development

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