Changes

Instructor, Andy Schlafly

Instructor, Andy Schlafly

'''I. Introduction and Review'''

==Introduction and Review==

The mid-term exam should become your guide to filling in gaps in your understanding of economics.  Make sure you fully understand the concepts in the questions that you missed.  Be prepared to apply those same principles correctly to new problems.

The mid-term exam should become your guide to filling in gaps in your understanding of economics.  Make sure you fully understand the concepts in the questions that you missed.  Be prepared to apply those same principles correctly to new problems.

So, then, what is the Law of Diminishing Returns?  That is a rule that applies to ONLY ONE input.  It is when a company keeps its assembly line and factor size constant, for example, but keeps hiring more and more of one input, such as labor.  Eventually each added employee will have less and less to do.  The returns on the additional employees declines.  But if all inputs were increased at the same time, then the Law of Diminishing Returns does not apply.  Then it is a question of returns to scale.

So, then, what is the Law of Diminishing Returns?  That is a rule that applies to ONLY ONE input.  It is when a company keeps its assembly line and factor size constant, for example, but keeps hiring more and more of one input, such as labor.  Eventually each added employee will have less and less to do.  The returns on the additional employees declines.  But if all inputs were increased at the same time, then the Law of Diminishing Returns does not apply.  Then it is a question of returns to scale.

Consider this question:

Consider this question:

 

“The more someone has, the more he wants to make to be satisfied!”  What economics principle would best explain that phenomenon?

“The more someone has, the more he wants to make to be satisfied!”  What economics principle would best explain that phenomenon?

(a) Law of Demand

(a) Law of Demand

(b) Law of Diminishing Returns

(b) Law of Diminishing Returns

(c) Law of Diminishing Marginal Utility

(c) Law of Diminishing Marginal Utility

(d) Coase Theorem

(d) Coase Theorem

By the end of the course, make sure you understand the concepts in the problems that you missed.  Make sure you answer them correctly on the final exam.

By the end of the course, make sure you understand the concepts in the problems that you missed.  Make sure you answer them correctly on the final exam.

   

   

'''II. So you want to make some money?'''

==So you want to make some money?==

Traditionally there were four ways to make money:

Traditionally there were four ways to make money:

(1) Perform labor to earn wages.  This is how most people make most of their money.

(1) Perform labor to earn wages.  This is how most people make most of their money.

(2) Invest capital to earn interest.  This is what you can do once you save up some money.

(2) Invest capital to earn interest.  This is what you can do once you save up some money.

(3) Allow someone to use your land in exchange for rent.

(3) Allow someone to use your land in exchange for rent.

(4) Start a new business to earn profits.  But watch out here: 9 out 10 new businesses fail!

(4) Start a new business to earn profits.  But watch out here: 9 out 10 new businesses fail!

“[[Economic profits]]” is concept we’ve addressed before.  It is total revenues minus total costs, including opportunity costs of time and money in the costs.

“[[Economic profits]]” is concept we’ve addressed before.  It is total revenues minus total costs, including opportunity costs of time and money in the costs.

'''III. Interest'''

==Interest==

“There’s no free lunch,” according to the famous saying.  “It costs money to make money” is another aphorism.  Most ATMs charge $1.50 just to withdraw cash from your own account.

“There’s no free lunch,” according to the famous saying.  “It costs money to make money” is another aphorism.  Most ATMs charge $1.50 just to withdraw cash from your own account.

What is wrong with it?  The flaw is that it fails to address the time value to money.

What is wrong with it?  The flaw is that it fails to address the time value to money.

'''IV.  The Time Value of Money'''

==The Time Value of Money==

Suppose I told you that I will be giving you $100, but that you have a choice: either (1) I will give you the $100 today, or (2) I will give it to you in two years.  Which would you prefer?

Suppose I told you that I will be giving you $100, but that you have a choice: either (1) I will give you the $100 today, or (2) I will give it to you in two years.  Which would you prefer?

So $100 to be paid five years from now is the same thing as receiving only $78.35 today.  That’s due to the effect of the time value of money.

So $100 to be paid five years from now is the same thing as receiving only $78.35 today.  That’s due to the effect of the time value of money.

'''V. Investment Decisions'''

==Investment Decisions==

Using the time value of money, now we can make investment decisions.  As an owner of a company or just someone wanting to see your savings grow, you will need to make investment decisions.

Using the time value of money, now we can make investment decisions.  As an owner of a company or just someone wanting to see your savings grow, you will need to make investment decisions.

Look again at its cost.  Your decision?  Don’t buy it.

Look again at its cost.  Your decision?  Don’t buy it.

'''VI. Economic Rent'''

==Economic Rent==

There are four equivalent definitions of “economic rent.”  Pick the one you like the best and then use it to understand the others:

There are four equivalent definitions of “economic rent.”  Pick the one you like the best and then use it to understand the others:

Suppose there is only one house on a peninsula overlooking the ocean out of both sides of the house.  The economic rent is the excess in price that the owner can charge due its unique location.  The supply is one, and anyone determined to have that house must pay whatever price is charged.  Of course, the Law of Demand places a limit on the rent, because people can’t pay what they don’t have, nor will they pay more than what they value something at.  But the overcharge due to the uniqueness of the good is what constitutes the “economic rent.”

Suppose there is only one house on a peninsula overlooking the ocean out of both sides of the house.  The economic rent is the excess in price that the owner can charge due its unique location.  The supply is one, and anyone determined to have that house must pay whatever price is charged.  Of course, the Law of Demand places a limit on the rent, because people can’t pay what they don’t have, nor will they pay more than what they value something at.  But the overcharge due to the uniqueness of the good is what constitutes the “economic rent.”

'''VII. Economic Profits'''

==Economic Profits==

Remember that “economic profits” include far more than ordinary “accounting profits” or “profits” in the ordinary sense of the term.  “Economic profits” are total revenues minus costs that include opportunity costs, time value of money, and other hidden costs missing from most claims about profits.  Economic profits are much harder to come by.

Remember that “economic profits” include far more than ordinary “accounting profits” or “profits” in the ordinary sense of the term.  “Economic profits” are total revenues minus costs that include opportunity costs, time value of money, and other hidden costs missing from most claims about profits.  Economic profits are much harder to come by.

Inventors and other innovators can enjoy real economic profits.  Thomas Edison did, with his numerous marvelous patented inventions.  Patents give the holder an exclusive right to the product for 17 years.  Competition is prevented for that time, and enormous economic profits can be obtained without competition driving the price down.  AT&T used Alexander Graham Bell’s patent on the telephone to build a highly profitable company for a century.  But ultimately its economic profits dried up, too.

Inventors and other innovators can enjoy real economic profits.  Thomas Edison did, with his numerous marvelous patented inventions.  Patents give the holder an exclusive right to the product for 17 years.  Competition is prevented for that time, and enormous economic profits can be obtained without competition driving the price down.  AT&T used Alexander Graham Bell’s patent on the telephone to build a highly profitable company for a century.  But ultimately its economic profits dried up, too.

'''VIII. Assignment'''

==Assignment==

Review your mid-term exam again and understand why you missed certain questions.  Then answer the problems below:

Review your mid-term exam again and understand why you missed certain questions.  Then answer the problems below:

'''Introductory:'''

===Introductory:===

 

1.  Receiving $100 next year is not the same as receiving $100 today because of the _________________.

1.  Receiving $100 next year is not the same as receiving $100 today because of the _________________.

2.  “Free enterprise does not cause interest rates.  Impatience does!”  Explain both views.

2.  “Free enterprise does not cause interest rates.  Impatience does!”  Explain both views.

'''Intermediate:'''

===Intermediate===

 

3.  I agree to pay you $1,000 in one year, if you pay me ______ today.  The interest rate is 5%.  Fill in the blank, showing your work.

3.  I agree to pay you $1,000 in one year, if you pay me ______ today.  The interest rate is 5%.  Fill in the blank, showing your work.

5. If total utility is maximized, then

5. If total utility is maximized, then

(a) average utility is minimized

(a) average utility is minimized

(b) average utility is maximized

(b) average utility is maximized

(c) marginal utility is maximized

(c) marginal utility is maximized

(d) marginal utility is zero

(d) marginal utility is zero

Answer and explain.

Answer and explain.

7.  During hurricane season a town’s power plant was completely destroyed.  People wanted to buy kerosene to run their emergency generators.  But the price of kerosene doubled!  What is the effect of the price increase?  Should a new law force the price of kerosene down by half?

7.  During hurricane season a town’s power plant was completely destroyed.  People wanted to buy kerosene to run their emergency generators.  But the price of kerosene doubled!  What is the effect of the price increase?  Should a new law force the price of kerosene down by half?

'''Honors:'''

===Honors===

 

8.  Explain what “economic rent” is in your own words, using your own example.

8.  Explain what “economic rent” is in your own words, using your own example.