Principles of Macroeconomics Class 2

 okay so what we had been looking at last time was some basic ideas and we want to

continue that discussion we had looked at this idea of economic goods and Bad's we looked at a discussion of positive

and normative economics and what we essentially said was that when we think about it economics it's really a

decision science where we're looking at how are we going to turn these resources into goods and services right so we had

these things like our resources here we

had our goods and services and we said look we know that these guys right here are limited and scarce therefore we know

that these guys right here are gonna be scarce and limited so what we want to do

today is we want to look at what are these different resources that we consider and then what are some

important ideas to keep in mind and then what are some ideas that we don't want to keep in mind and I don't know that

we'll get to the things we don't want to do later today but we might get to them

on Monday so let's look at these resources basically we classify them into four different kinds here all right

and our first one here is land and you'll notice I've got a little bit of space right here so when we're talking

about resource the land being a resource we don't actually mean that we have to actually physically be somewhere although that is part of it right so

we're talking about all of the natural resources

all right so we've got minerals you know forests

arable land water

that's such all right so in other words if we're gonna make something we got to be somewhere and we're looking at those

resources that are part of the land we call that basically land our second one

is labor

so this is all of the physical

and mental talents of men and women

right so these are you know football

games by football players and doctors and lawyers and car mechanics and

janitors and computer guys all this stuff we've got capital and you can kind

of think of capital as the manufactured aids in the production process

now if you're in an accounting class or a finance class and somebody uses the

word capital what would they be referring to money alright but capital

is not money right money is just a little green piece of paper that we use to facilitate trade money itself doesn't

create anything and when we talk about capital it doesn't have to be the things that we can physically touch a

distribution network as a form of capital right so when we're looking at capital the production of education

we've got boards and markers and desks and chairs computers all of those are

examples of capital you have a question okay and the fourth one here is

entrepreneurship

so the entrepreneur is the person that combines land labor and capital

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all right to create goods and services basically somebody's gonna be in charge somebody's gonna come up with the ideas

so remember what we said here's our four different classifications of resources

it's either gonna be laying it's gonna be labor it's gonna be capital we're gonna call it entrepreneurship these

guys are limited and scarce infinite amount of land no infinite amount of

labor no infinite amount of capital no

infinite amount of entrepreneurship no all of these guys are limited in scarce

so since these guys are limited in scarce they need a factor payment right

because land labor and capital and entrepreneurship don't have to do one

particular thing they can do lots of things so let's look at land for example

right now we've got land Missouri State University sits on some land what else

could that land be used for housing so

we've got some land here MSU could be used for housing so we'll

tear this down and build homes what else

retail stuff

no could be anything and do what with it

forest for trees for lumber or Park

don't have to tear it down or all right parks have value right I like parks

trees are good

yada yada yada yada yet alright could use it to grow wheat potatoes or

whatever so if we want land to not be used for housing retail forests to

create lumber or to create a park we all this other stuff we have to hire it away from those alternative uses right and

what do you pay your landlord every month rent that's the name of the factor

payment for land all right let's look at a labor how many of you guys have a job

okay what's your job okay so sales what's your name Joe okay so is that the

only thing you can do there's nothing else in life you can do okay so what are

some other things you could do such as

farming I meant right now yeah

labor wise there's only one thing you can do you can't be a waiter could you

be waiter work in the kitchen at chick-fil-a janitor

day care all right I don't make you want

to not have kids yada yada yada yada yeah right so here's what Joe's doing

and there's a list of stuff that Joe could do if the company he works for

wants him to do that and to not be a later they're gonna have to hire him

away from these alternative uses all right because he has lots of alternative

uses so what do you think the name to

the factor payment for labor is what do you think would call that wages

what do you think is true about this factor payment relative to the amount of

other things that they can do I don't

give you an example my brother is a high school dropout in a convicted felon

we'll get to that a lot later on that's not necessarily true here we've got two

different people who got person a we got person B person a no high school high

school dropout person B college grad

felon not felon drug addict shows up to

work

how many alternative uses are there for this person not very many all right

my brother did not complete high school he's a convicted felon he has serious drug and alcohol problems you cannot

show up to work on time that's really hard for him getting up in the morning and doing stuff so sales job we need you

here at 8 o'clock can you be here at 8 o'clock maybe can't do that can't do

farming right cows want to be fed pigs want to be fed waiter cook the list of

stuff he could do it's pretty small the

list of stuff this person could do relatively large right ceteris paribus

keeping everything else constant this factor payment that this person is going to receive is going to be smaller than

this one right there are fewer alternative uses for your labor and

since there's fewer people competing for your labor the size of that factor payment is a whole lot smaller capital

let's look at our building here we've got our strong Hall

it's a piece of capital right now it's being used to produce education what

else could it be used for yes

so we could use it for TV and radio production what else

would you guys want to live in this room you could so we'll say Holmes put a daycare in

here yeah totally could you assemble computers in the

building

yeah yeah yeah yeah right so here's our

factor right capital and if it has lots

of different alternative uses its factor payments gonna tend to be relatively high it has a few alternative uses the

factor payment tends to be relatively low what does your bank pay your savings account interests finally you come to

entrepreneurship this is the person that combines land labor and capital and says you know I need some land and I'm going

to combine that with a building and I'm going to combine that with some labor

and I'm going to produce and assemble computers right and in essence the

factor payment that the entrepreneur gets is called profit all right so the

more alternative uses them these resources have the higher the factor

payment the fewer alternative use fewer alternative uses that they have right

typically speaking to lower the factor payment right or if what they can produce isn't very high valued then the

factor payment tends to be relatively small have you guys ever flown in an airplane out to like California and you

fly over the desert west and you look out the plane window and what do you see

desert you see brown there's nothing to look at all right can't grow anything on

it if there's not minerals there the what the land is worthless right so these factor payments are a

reflection of the alternative uses from these different resources and the things

that those resources can make so let's look at some ideas that we want to keep

in mind when we're doing economics right so here are some important ideas that

we've got

and this first one here is probably one of the most important that's the idea of opportunity costs so the definition is

pretty long so I'm gonna read it rather than writing it out so I don't have to erase all that so I'm going to read it

to you several times okay so opportunity cost is using resources to

produce one good

using resources to produce one good diverts those resources away from the

production of alternative goods using

resources to produce one good diverts those resources away from the production of alternative goods

these alternative goods that are sacrificed to create the original good

is the opportunity cost of the original good these alternative goods that are

sacrificed to create the original good is the opportunity cost of producing the original good so once again using

resources produce one good diverts those resources away from the production of alternative goods these alternative

goods that are sacrificed to create the original good is the opportunity cost of creating the original good you can see

why I didn't want to write all that out

using resources reduce one good diverts those resources away from the production

of alternative goods these alternative goods that are sacrificed to create the original good is the opportunity cost of

creating the original good okay so on

this side we've got a butterfly this

aside I've got a fish huh if I cut out the fish to put them on my wall what's

the opportunity cost the butterfly I'll cut off the butterfly to put them on my

wall what's the opportunity costs the fish all right this is why I hate

technology it'll take too long to get the ELMO up and running to show you this so I'm gonna show you this

what is that Joe it's a tree all right

so there's this giant tree here okay and it's kind of hard to tell can you see

that there's a space underneath there they're lifting this tree up okay so they got this giant tree you guys have

seen them do this I'm assuming all right so here's this giant tree you can kind

of see it here here's the tree and then here's this and there's some workers right here underneath it Wow

let's read what this says when a big chain store let's face it we all know

who the big chain store is wanted to build a certain on a certain lot in Urbandale Florida a 120 year old oak

stood in the way rather than cutting it down the retailer paid more than $100,000 to have the tree transplanted a

practice that's becoming more common as municipalities require developers to preserve tree canopy saving trees

creates positive publicity and attracts crowds to come to watch the process just like the circus came to town the Armand

Dale Oaks move took six weeks of preparation the uncovering and trimming it's 42 foot wide root ball the movers

slid steel rods underneath which you can see above and the 353 ton tree was

lifted onto a trailer for transport to its new home 500 yard away in a wetland preservation area so

far the old tree is doing just fine alright okay so a hundred thousand

dollars to move the tree what is the

opportunity cost of this guy and don't think in terms of like medicine and things like that that's obvious well we

could have saved one hundredths of you know kudo vaccinated fifty kids on which you could have done or whatever the

number is they're doing it for environmental reasons

what could the hundred thousand dollars have done environmentally speaking how

much do trees cost at Home Depot and Lowe's ten bucks that's not about right

what's gonna have more tree canopy one tree or 10,000 trees that got planted

you see what I'm saying this is what we mean by opportunity cost and it's not

that necessarily saving the trees a bad thing I mean maybe they sign the Florida Constitution underneath it or whatever

but it doesn't say anything about that right it's just a tree if you're going to spend a hundred thousand dollars to

save one tree and you're interested in tree canopy I'm not saying that tree canopy is a bad thing the tree canopy is a good thing but you could have taken

this hundred thousand dollars and used it to plant a whole bunch of different trees and created a whole lot more tree

canopy then saving the one tree or we

could have used one hundred thousand dollars to vaccinate kids or build homes or education for somebody blah blah blah

right there was a whole bunch of these other things that you could have done what about you guys if you are not here

right now what would you be doing sleeping or working or

TV

time with boyfriend / girlfriend [Music]

yada-yada yada-yada alright your opportunity costs for being

here is this highest-valued alternative right here is all the alternative things that you could be doing and the

opportunity cost says not here's all the things that could be doing opportunity

cost us all these things opportunity cost is the highest valued alternative because you can't do sleeping working TV

time with boyfriend/girlfriend and being here all at the same time right we can't both save the tree and plant 10,000

trees or save the tree and vaccinate the kids save the tree and have the free

college education for 10 people or save the tree and build two homes or whatever

it is so we're here we're looking at our highest valued alternative

all right that's what we're looking at when we were looking at said you have opportunity cost and since by definition

every single choice has at least every single decision that we make has at

least two different choices otherwise it's not a decision every single

decision that we make by definition has to have an opportunity cost you can't

get away from clear very important

concept it doesn't go away it's a way of thinking you have to learn up you have to think about it it's not something

that you just answer on a test it's a way of thinking about the world number

two

people know that resources are scarce and therefore they will attempt to economize

people know that resources are scarce and they will attempt to economize so what we mean by this is that given a set

of choices that have equal cost we're

going to choose the one that has the greatest benefit

or given a set of choices that have equal benefit

cheers one has the lowest cost all right so let's assume that you guys don't get

into football games for free you've got to pay the game takes about two hours a

movie takes about two hours a cost basically the same right so you've got

about two hours worth of time and ten bucks to get into the movies two hours for the time and ten bucks to get into a football game what this guy says is

really really simple hey these guys both cost the same and it says if I'd rather go to the movies then go to the football

game I will do what go to the movies if

I would rather go to the football game I will go to the football game very very simple we could also like I

said we got two different choices that have equal benefit and we're gonna

choose the one that has the lowest cost so you can have two different jobs you're working at say McDonald's and you

can work at the one here in Springfield or you can work at the one in Rolla all

right and if you live in Springfield and they both pay the same two pays not

different it's the same cute guy or girl that you get to work with the same crappy customers it's all the same what

this guy says is that given a choice of working at the Springfield McDonald's or working at the Raleigh McDonald's if I

live in Springfield and they both pay the same and they both have the same cute guy or girl and they both have the same crappy customers which one am I

gonna work at Springfield why you got

gas money time

wear and tear on your car etc right they both have the same benefit same paycheck

sighs but this one has a higher cost both in terms of gas and time and wear

and tear on my car number three incentives will alter people's behavior

if your grade in this class was determined by chance I'm just gonna pick

your name out of a hat at the end of the semester and assign your random grade a B C D or F what incentive would you have

to show up no all right but your grade is depended upon how will you do on

tasks homeworks and quizzes you have an incentive to come to class and show up and this works not only for things like

class but other things like so for example in the former Soviet Union when I was growing up it wasn't Russia it was

the Soviet Union all right the Soviet Union they would tell people make this

stuff here's the stuff make it under these space under these specifications and so they had a windshield maker and

so the windshields are of course the things that go in your car and they said

okay we're going to pay you on the basis of weight right

how can you get glass to be heavy thicker alright and in fact what they

would do is they would make some windshields that were three feet thick

because that's how they got paid can you have a three-foot thick windshield no

that's stupid so Stalin takes these group out shoots them puts in another group says okay

wait doesn't work we're gonna pay on the basis of area here's the stuff you need

to make windshields we're gonna pay on the basis of area now what did they do they made them really then this was a

three-foot thick windshield all right here's the stuff to make windshields based upon the area of the windshields

I'm gonna make my windshield it's really really really really thin all right so they put in these really thin

windshields people are driving down the street and their cars rocks are coming up like they always do they hit the

windshields and for us it's like Oh nuts is there a little scratch there no no I look out yay for them rocks are popping

up the windshields are so thin they're breaking people are getting cut with glass at 50 miles an hour bleeding out

Stalin takes that group out shoots them all right incentives are gonna alter

people's behavior they were paid on the basis of weight or area they made three-foot thick windshields they made

really really really thin windshields number four

economic agents make decisions at the margin every time you see the word an economic agent that's just a

decision-making unit that's all that that is people households firms governments etc bless you what we mean

here by the margin is people examine the marginal benefits versus the marginal

costs

and every time you see the word marginal benefits or marginal cost you can substitute in your mind the word

additional

so let's think about what this guy says he says we want to look at the

additional benefits in the additional cost of doing something and essentially what this means is that if the marginal

benefits are greater than the marginal cost then we want to do it right if the

marginal costs are greater than the marginal benefits then we don't want to

do it basically you want to do it up until these guys are equal to each other so let's think about what this means in

class you've got a grade

what percentage-wise grade should you shoot for in this class

okay and what percentage gets you that 90 why not shoot for a hundred percent

exactly

how much effort does it take to get in

90% some amount alright whatever that is

here's the amount of effort that it takes takes X amount how much effort does it take a 100 percent not 10% more

what do you have to do to get a 100% in the class everything has to be

completely right every single time you can't miss a single task question you can't miss a single question on a quiz

you can't miss a single homework you get every single homework perfect is that more than 10% effort at 90% you guys

think so you guys think it's only 10% more effort to go from a 90 to a 100% 100% 100% in your college algebra class

every single homework completely correct every single time every single test you

think the amount of time that it takes to study here's your study time to get a

90 that's some amount of time for the semester whatever it is I'm making up a

number a hundred hours you think it's only ten more hours to go from a 90

percent to a 100 percent in college algebra no do you think it's only 10

more hours to go from a 90 percent to a 100 percent in economics no it's a whole

lot more effort the marginal costs are

huge and what's the marginal benefit nothing

because this guy gets an A and that guy gets an A and in fact if you said to

yourself I'm gonna get a 100% in dr. Mitchell's class because I want to get a 100% that's fine I don't care

but what happens to your grade in biology your sociology class in your

anthropology class you are a religious

studies class what do you have to do

give up time to study for them which means those grades will probably do what fault

how much effort is that zero to ten percent you know how you know how to get

a zero that's easy how do you get a zero don't do anything how do you get a ten percent in class

barely do anything this is 10 percent hard this 10 percent is easy right this

10 percent is I'm not even going to study for the test I'm gonna randomly put in stuff statistically speaking you

should at least get a 25 percent in a class if there's four questions for answers on each of them test questions

right statistically speaking so this 10 percent right here the first 10 percent

that's easy all right the marginal costs of the first 10 percent no problem the marginal costs of

the last 10 percent very difficult so what this guy says is that people should

make decisions at the margin they should examine the marginal benefits and the marginal costs all right well look at

this get we see this guy a whole lot

number five

information is important but it's costly to obtain why would we need information

exactly very good so we need information to help us make better decisions right we want to know what do i do do I do a

do I do B or do I do C information helps us know which one of those to do and it

helps us to know what the marginal benefits are and what the marginal costs are so how much information should we

obtain and be careful in your answer

essentially yes we should collect information

until the marginal benefits of collecting more information equal the

marginal cost of collecting more information

all right so let's use a couple of examples to kind of illustrate what we

mean by that because it was like what did you mean by that that doesn't make sense you're in st. Louis you're driving

around you need gas do you pull over to

the side of the road call every single gas station in the greater st. Louis metropolitan statistical area to see who

has the cheapest gas because that's full information you now know who has the

cheapest gas is that what people typically do no they drive around they

see a couple of stations two or three maybe and then they make their decision from that right they don't have by definition they do

not have full information but the marginal cost of collecting all of that

information on all of these different gas stations is relatively large all right and so we can see here the

marginal cost of collecting information

on all gas station prices

is larger than the marginal benefit all

right because they're only gonna vary by a couple of cents one way or the other anyway maybe ten cents maybe so if your

gas tank holds 20 gallons you're talking about two bucks right is that worth it's

being on the foam all day long with every single gas station in the greater st. Louis metropolitan statistical area

to save $2 probably not right so we're gonna collect information up until the

point where the marginal benefits of collecting more information is that were the marginal cost of collecting more information you get an exact same thing

with restaurants you and your friends want to go out to a restaurant which restaurant do you go to right you need

information who's got what meals who's got what prices is the food good stuff

like that the problem is how do you get

full information on every single one of these restaurants

you can't necessarily write so is it possible that you can go to the

wrong restaurant totally right because

if you think about it you want to say to yourself I need to collect as much information on the local restaurants

here to determine where to eat and I

know from dr. Mitchell's class that the marginal cost of collecting all that information is going to be really really

high the marginal benefits of collecting information we're really really low so don't collect all the information but I actually need information on the

marginal cost of collecting information and the marginal benefit of collecting information you see what I'm saying

so you've got the information here on the restaurants here's the full information on the restaurants how do

you know you've collected information to where the marginal benefits of more information is equal to the marginal

cost of more information

you see what I'm saying you see the problem I know I need to collect

information I know the marginal benefits of more information the marginal cost

some more information need to be equal however I need information on what is the marginal benefits have collected

more information and I need information on what is the marginal cost of collecting more information you see what

I'm saying which means of course you need information on the marginal

benefits of collecting information to collect the marginal benefits of more information you see what I'm saying so

it's possible that you're going to make mistakes going to a restaurant that serves bad food is not an example that

capitalism is horrible it's a problem of information it's a problem of collecting

the information right you're gonna choose bad meals you're going to go to the gas station that charges the higher price it's just going to happen you're

not always going to be able to have and do the most efficient solution right

because knowing what the most efficient answer is knowing this guy right here

just think of it like a bull's-eye here's your bullseye tell you what let's

do it this way

here's your barn here's your bullseye

got any bow hunters

how hard is it to hit the barn not hard at all alright true anybody could do it

we don't are not interested in he didn't appear we're interested in hitting here as we get closer and closer and closer

to trying to hit this guy right here how much harder does it get gets harder yeah

the person who's never shot a bow in their life can do this the person who

says wow I really missed the target I'm gonna work at it alright I'm going to expend energy trying to figure this out

marginal cost marginal benefit hey I'm getting closer marginal benefit getting closer to marginal benefit getting

closer right you can make the bullseye be as small as you want it to be you see

what I'm saying it could be you must be within two millimeters of this point how

hard would it be to get within two millimeters of a point very hard it's

gonna take a lot of practice but you can get to the point where does it matter if

you're with into manure on a deer deer do you have to be within two millimeters

of where you want to be no all right you can be a little bit off and still get

enough of the deer debt all right it doesn't have to be exactly two

millimeters right you can be off by a couple of inches and you're okay though deers like this sucks

I got an arrow in me it's the same thing here right the marginal cost of going

from here to here is pretty small the marginal benefits are really big as you get closer and closer and closer and

closer and closer the marginal cost gets higher and higher and higher and the marginal benefits getting smaller and

smaller and smaller you're off by a smaller and smaller function right so it's the exact same thing here with

information the problem is of course if this is your target how much marginal benefit does it take

to get from here to get to here what's the marginal cost how much training does

it take to get from here to get to here I don't know and sometimes that itself

needs information we are done okay we'll pick it up with

economic actions generating long-term effects so read this handout that I

passed out deals with essentially opportunity costs I will see you guys on Monday