ECONOMICSECONOMICS - - “Science of scarcity”“Science of scarcity”-the study of the choiceschoices people make in an effort to satisfy

their unlimited needs unlimited needs and and wantswants from limited resourceslimited resources.

The science of “scarcity”The science of “scarcity”

At first the job seeker optimistically looks looks for his next jobfor his next job..

Then, after many rejections, he becomes a reluctantdiscouraged workerdiscouraged worker.

With pressure frombill collectors (and hiswife), he holds up a he holds up a 7-11 7-11 & & shoots a clerkshoots a clerk.

And – the Texas Justice System will

tell him to,““Take that.”Take that.”

Eventually he is caught and incarceratedincarcerated.

And his kids will cry because they no longer can go can go to to private schoolprivate school.

And – how did President George W. And – how did President George W. Bush do in college economics? Bush do in college economics?

Let’s take a look at his Let’s take a look at his college transcript.college transcript.

Econ 71/ 72Econ 71/ 72

Gov 73 /71Gov 73 /71

Overall average 77Overall average 77 Kerry’s overall college ave. was 76.Kerry’s overall college ave. was 76.““So - If your son or daughter is having So - If your son or daughter is having aa hard hard timetime in in economics, don’t worry about it. They are economics, don’t worry about it. They are on schedule to be President on schedule to be President of theof the United States.” United States.”

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PricePrice QDQD

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$250.00$250.00

D Reasons For Reasons For Downsloping “D”Downsloping “D” Curve Curve1. Income EffectIncome Effect –current buyers buy more.2. Substitution EffectSubstitution Effect– new buyers now purchase.3. Diminishing MarginalDiminishing Marginal Utility Utility - because buyers of successive units receive less marginal utility, they will buy more only when the price is lowered.

Change in QDChange in QD1. Price changePrice change2. MovementMovement [up/down the demand curve]3. Point to pointPoint to point [along the curve]

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““D”D” refers to the “whole curve”.“whole curve”. [““all pricesall prices””]““QD”QD” refers to a “point on the curve”“point on the curve”

based on a “particular price.”“particular price.”

““Demand Shifters” [TIMER]Demand Shifters” [TIMER]1. 1. TTaste [aste [directdirect]]2. 2. IIncome [normal-ncome [normal-directdirect] [inferior-] [inferior-iinnvveerrssee]]3. 3. MMarket Size [number of consumers-arket Size [number of consumers-directdirect]]4. 4. EExpectations [of consumers about future xpectations [of consumers about future *price*price--directdirect, , about future availability-about future availability-iinnvveerrssee, or about future income–, or about future income–directdirect..5. 5. RRelated Good elated Good *Prices*Prices [substitutes- [substitutes-directdirect] [complements-] [complements-iinnvveerrssee]]

Changes in “D” [curve]Changes in “D” [curve]1. Non price change [“TIMER”]2. Whole “D” curve shifts[There is a change in “QD” but it isnot caused by a change in “price.”[QD-”single price”QD-”single price”; D-”all prices”D-”all prices”]

ComplementComplement[[iinnvveerrssee]]

SubstituteSubstitute

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1. “Non price Level” change-either CC, IIgg, GG, or XXnn2. “Whole AD curve” shifts[There is a change in AQD but it is not caused by a change in price level.]

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GG

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Chevy Chevy FerarriFerarriXXNN[[Exports-Imports]Exports-Imports]

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Reasons For Upsloping “AS” CurveReasons For Upsloping “AS” Curve1. There is increasing opportunity cost if firms don’t produce.2. Current producers produce more [overtime/more shifts]3. New producers are attracted to the market.

““AS”AS” refers to the refers to the “whole AS curve”“whole AS curve” & refers to & refers to “all price levels”“all price levels”““AQS”AQS” refers to a refers to a “point on the AS curve”“point on the AS curve” & refers to a & refers to a “particular price level”“particular price level”

Change in “AQS”Change in “AQS”1. Price Level change2. Movement (upup/downdown) “AS” curve)3. Point to point (along “AS” curve)

ASAS

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Price Level increasesincreases; AQS increasesincreasesPrice Level decreasesdecreases; AQS decreasesdecreases

Ben Stein [from “Ferris Bueler’s Day Off”] graduated from Ben Stein [from “Ferris Bueler’s Day Off”] graduated from Columbia University in 1966 with a degree in economicsColumbia University in 1966 with a degree in economics and from Yale Law School in 1970and from Yale Law School in 1970 as as valedictorian. He was valedictorian. He was a speech writera speech writer for for Nixon. HeNixon. He has has written 16written 16 books, books, including including

his latest humor book, “How To Ruin Your Life”.his latest humor book, “How To Ruin Your Life”.

Ben Stein’s part in this Ben Stein’s part in this movie as a boring econ movie as a boring econ prof was voted one of the prof was voted one of the 50 most famous scenes 50 most famous scenes in American film.in American film.

Tax $Tax $

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AAddaappttiive eve exxppeeccttaattiioonnss v viieeww - S - SRRPPCC & & LRPCLRPCThere is aThere is a SSRRPPCC [output prices are changing][output prices are changing] and a and a LRPCLRPC[output [output & & input prices input prices chg afterchg after unanticipated unanticipated inflation inflation or or disinflationdisinflation]]

LRPCLRPC - when unemployment = the natural rate and there is no tendency for PL to be incr/decr. PL is stable & contracts reflect it.

Let’s say that inflationinflation

has averaged 99%% forthe past few years.

99% is anticipated% is anticipated.

0 0 22%% 44%% 66%% 88%% 10 10%%

But my raise was only 6%.

My salary just My salary just isn’t keeping up.isn’t keeping up.

1212%%

99%%

66%%

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Wow, my raise exceeds inflation.

Let’s say that inflationinflation has averaged 33% % for three years. 33% is anticipated.% is anticipated.

But my salary went up by only 3%.

It can’t get any better.My raises exceed inflation.

But when it comes time to sign a new contract, his boss says …