Lecture 2. Scarcity, Choice, and Positive Science

Aplia Notes:                                   

1. You must use your @uwo.ca e-mail account

2. To see all the assignments for the entire term, including the assignments that I want you to do this week, please click on "View All Assignments". The assignments are generally due after we cover the material in the lecture, but you should do them sooner rather than later. Having your computer crash just before the assignment is due is not an acceptable excuse for not doing the assignment.

3. The chapter titles listed on the reading list do not always correspond to the Aplia quizzes you will be taking in a given week. To see the assignments, just look under the list of "Current Assignments" on the Aplia site.

Another component of The Economic Way of Thinking is the recognition of the importance of the Rules of the Game, also known as "property rights" or "legal entitlements". Without understanding the rules of the game, we cannot understand the incentives to which people respond.

To do good science, we must try to focus our attention on positive (vs. normative) statements:

• Positive statements deal with "what is" - they are testable statements of fact (though not necessarily correct). E.g. "The sky is blue," is a positive statement. So is, "The sky is red." Both are testable statements about what is.
• Normative statements deal with "what ought to be" - they involve "shoulds" or value judgments or moral statements.
• Examples:
  1. This class has over 300 students in it  --  positive.
  2. Small classes promote learning  --  probably positive.
  3. We need more small classes at this university  --  probably normative, depending on the context.
  4. Introductory Economics is an exciting course!  --  probably positive  8-)
  5. Thou shalt not kill.

Believe it or not, economics deals with what is and less with "shoulds".

Scarcity and Choice

Several students have asked for recommendations for additional reading. Here are two books that I highly recommend:

   Review:  

Two fundamental assumptions:

1.  unlimited human wants

2.  Limited Inputs (productive resources; factors of production):

Unlimited Wants + Limited Inputs mean we have scarcity
Scarcity is the economic problem.

• You may not like this conclusion about scarcity
• You may think we should not be this way.
• You may think it is a giant conspiracy that we face scarcity.
• Nevertheless, this approach helps us understand the world as it is.

Believe it or not, economics deals with what is (positive economics) and less with "shoulds" (normatives).

 Scarcity necessitates choice:

1. What will be produced?
2. How will it be produced?
3. When will it be produced? 
4. Who gets the goodies? How do we determine who gets the goodies?

• Might makes right?
      Yossarian in Joseph Heller's Catch-22: They have the right to do whatever they cannot be prevented from doing.
• Physical attributes
      appearance: why else all the attention paid to physique, clothing, cosmetics, etc. See this, which explains why Russian women are more beautiful now than they were in the 70s.
      abilities: speed, dexterity, stamina, conditioning
• Inherited wealth
      genetic -- physical and intellectual
      financial - note competitions when wills are contested
• Personality -- wit and charm
      How to Win Friends and Influence People
• Education
• Randomness
      Queen's housing lottery
      Syracuse Add-Drop lottery
      Blue Jays playoff tickets
• Queuing
      Scalping - Steve Levitt's classes.
      Scarborough U of T campus seats in classroom
• Connections and political instincts
• motivation, effort
• historical patterns (e.g. marketing boards and steel)
• geography

These criteria create incentives, and remember:

People respond to incentives!

Opportunity Costs

Much of economic analysis addresses the question: what should be produced?

Example not covered in class:

My younger son, Adam Smith Palmer:

chips and chocolate bar example: $5 and prices of $.50 each -- can't buy 10 of each if he has only $5.

Introduce buns-gutters trade-off. Emphasize limited resources and fixed technology:   

Start at 1000 buns and no gutters. To get 50 gutters, must give up only 20 buns because the last few buns produced were made using resources that aren't very efficient at producing buns but are very good for making gutters.
Then, as we consider producing more buns [or gutters], we see that we would need to give up increasingly more of the other product.  E.g.:

• between G and I, give up 65 gutters to get 320 more buns (or vice versa)
• between D and E, give up 70 gutters to get 140 more buns (or vice versa)
• between B and C, give up 200 gutters to get 150 more buns (or vice versa),
• etc.

good? bad? it doesn't matter: it's a result of scarcity -- We must make trade-offs!

Plot these trade-offs to show a:

Costs are measured in terms of foregone opportunities

The cost of deciding on one line of action
 is that I must give up my next best alternative.
Hence,
All costs are opportunity costs.

For Next Time:

1. Use opportunity cost curves to examine trade-offs between:

   ·         e.g. education and other goods

2. Finish reading Chapters 1 and 2 of the text book.
3. Do the graded Aplia introductory quiz.
4. Make sure you can do the math in the math practice quiz.
5. Come to class prepared to answer this question:
    How might we get beyond a point on the production possibilities curve?