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Thirteenth Lecture – The Big Picture

Thirteenth Lecture – The Big Picture

 

==Introduction==

'''I. Introduction'''

We’ve covered all the issues concerning individual decisions by companies and consumers.  We’ve discussed supply and demand.  We’ve addressed marginal revenue and marginal cost.   

We’ve covered all the issues concerning individual decisions by companies and consumers.  We’ve discussed supply and demand.  We’ve addressed marginal revenue and marginal cost.   

This class we will explain the big picture of trade.  We also begin our final review.

This class we will explain the big picture of trade.  We also begin our final review.

'''II. Trade'''

==Trade==

What is “trade”?  It is an exchange of goods or services or money by one person for goods or services or money from another.  When I give you an Alex (“A-Rod”) Rodriguez baseball card in exchange for your giving me a Derek Jeter card in return, this is called a trade.  We would not make the exchange unless each of us felt we would be better off as a result.  Maybe I have two “A-Rod” cards and the second one doesn’t mean as much to me as it would to you, for example.

What is “trade”?  It is an exchange of goods or services or money by one person for goods or services or money from another.  When I give you an Alex (“A-Rod”) Rodriguez baseball card in exchange for your giving me a Derek Jeter card in return, this is called a trade.  We would not make the exchange unless each of us felt we would be better off as a result.  Maybe I have two “A-Rod” cards and the second one doesn’t mean as much to me as it would to you, for example.

The “balance of payment account” consists of two accounts that keep track of the goods and services entering and leaving a country: the “capital account” and the “current account.”  The capital account monitors physical and financial assets; the current account monitors goods and services.  Familiarity with these terms suffices, and do not worry if you do not fully understand them.

The “balance of payment account” consists of two accounts that keep track of the goods and services entering and leaving a country: the “capital account” and the “current account.”  The capital account monitors physical and financial assets; the current account monitors goods and services.  Familiarity with these terms suffices, and do not worry if you do not fully understand them.

'''III. “Free Trade” versus “Protectionism”'''

==“Free Trade” versus “Protectionism”==

One of the oldest political issues is the debate between “free trade” and “protectionism”.  This has been an issue in American politics for over 200 years.  What is the controversy?

One of the oldest political issues is the debate between “free trade” and “protectionism”.  This has been an issue in American politics for over 200 years.  What is the controversy?

The third argument for “protectionism” is as follows.  Workers facing loss of jobs due to the outsourcing to other countries ask this: why aren’t the executive jobs exported in addition to the jobs of the employees?  Sure, workers are cheaper in China and India than American counterparts.  But moving the highly paid executive jobs to those countries would save even more money (per worker)!  The advocates of free trade appear to be selective about which jobs they support moving offshore.  Why not start with moving their job to a foreign country first?  They do not seem to be volunteering for that.

The third argument for “protectionism” is as follows.  Workers facing loss of jobs due to the outsourcing to other countries ask this: why aren’t the executive jobs exported in addition to the jobs of the employees?  Sure, workers are cheaper in China and India than American counterparts.  But moving the highly paid executive jobs to those countries would save even more money (per worker)!  The advocates of free trade appear to be selective about which jobs they support moving offshore.  Why not start with moving their job to a foreign country first?  They do not seem to be volunteering for that.

'''IV.  Tariffs'''

==Tariffs==

Tariffs are a tax on imports.  They raise the price of imported goods, and the supplier must then reduce its received price to attain the same level where supply meets demand.  This has the effect of reducing supply, which is exactly what the protectionists want.  A tariff on Toyota cars, for example, would reduce the supply of Toyota cars in the market.  Ford and GM like that.

Tariffs are a tax on imports.  They raise the price of imported goods, and the supplier must then reduce its received price to attain the same level where supply meets demand.  This has the effect of reducing supply, which is exactly what the protectionists want.  A tariff on Toyota cars, for example, would reduce the supply of Toyota cars in the market.  Ford and GM like that.

For most of our country’s history (until the Sixteenth Amendment legalized the income tax), our federal government’s major source of revenue was tariffs.  The issue of the tariff was a recurrent controversy that divided the pro-tariff North from the anti-tariff South.

For most of our country’s history (until the Sixteenth Amendment legalized the income tax), our federal government’s major source of revenue was tariffs.  The issue of the tariff was a recurrent controversy that divided the pro-tariff North from the anti-tariff South.

'''V. Possibilities of Production'''

==Possibilities of Production==

“Possibilities of production” is an important concept.  It means all the different combinations of goods a nation can produce.  The United States can produce X cars and Y bundles of wheat, for example.  Or it could produce more than X cars and fewer than Y trucks.  We could graph the number of cars on the Y-axis and the number of trucks on the X-axis, and draw a “production possibility” curve through all the possible combinations.  It would be downward sloping: more cars means less trucks, and vice-versa.  The opportunity cost of producing more cars is the loss in production of trucks.  In the production possibility curve for cars and boats shown in Figure A (attached), the opportunity cost of moving from point A to point B is 100 cars.

“Possibilities of production” is an important concept.  It means all the different combinations of goods a nation can produce.  The United States can produce X cars and Y bundles of wheat, for example.  Or it could produce more than X cars and fewer than Y trucks.  We could graph the number of cars on the Y-axis and the number of trucks on the X-axis, and draw a “production possibility” curve through all the possible combinations.  It would be downward sloping: more cars means less trucks, and vice-versa.  The opportunity cost of producing more cars is the loss in production of trucks.  In the production possibility curve for cars and boats shown in Figure A (attached), the opportunity cost of moving from point A to point B is 100 cars.

Economists observe that utilizing the Law of Comparative Advantage can improve the production possibilities.  Suppose your job paid you $9 but you could hire a cook for $6.  Then it might make sense for you to work one more hour and hire someone to save you one hour of cooking.  In the absence of taxes, you would be $3 better off.  Then you could work one-third of an hour less to make the same money (after expenses) as before.  That extra one-third of an hour could be added to your sports or relaxation time.  You have moved your “production possibilities frontier” (the curve of all possibilities) outward, for greater benefit.

Economists observe that utilizing the Law of Comparative Advantage can improve the production possibilities.  Suppose your job paid you $9 but you could hire a cook for $6.  Then it might make sense for you to work one more hour and hire someone to save you one hour of cooking.  In the absence of taxes, you would be $3 better off.  Then you could work one-third of an hour less to make the same money (after expenses) as before.  That extra one-third of an hour could be added to your sports or relaxation time.  You have moved your “production possibilities frontier” (the curve of all possibilities) outward, for greater benefit.

'''VI. Review'''

==Review==

The key to mastering economics is to learn to quiz yourself on the principles to make sure you understand it.  The review list in Lecture #10 should be useful, and return to it again and again.   

The key to mastering economics is to learn to quiz yourself on the principles to make sure you understand it.  The review list in Lecture #10 should be useful, and return to it again and again.   

Why is AVC and ATC so important?  Because that helps determine your profit or loss.  You’ll shut down your company if you lose money from making additional goods, which happens in the short run when AVC > P.

Why is AVC and ATC so important?  Because that helps determine your profit or loss.  You’ll shut down your company if you lose money from making additional goods, which happens in the short run when AVC > P.

'''VII. Assignment'''

==Assignment==

The assignment is to begin studying for the final exam.  These questions are for review only.  The answers will be posted on www.conservapedia.com .  You do not have to hand in answers.

The assignment is to begin studying for the final exam.  These questions are for review only.  The answers will be posted on www.conservapedia.com .  You do not have to hand in answers.

'''Introductory:'''

===Introductory:===

 

1.  The curve that illustrates how much a company or country can produce of multiple items is called the ________________________.

1.  The curve that illustrates how much a company or country can produce of multiple items is called the ________________________.

2.  A monopolistic competitive firm has the following characteristic that is lacking for a perfectly competitive firm:

2.  A monopolistic competitive firm has the following characteristic that is lacking for a perfectly competitive firm:

(a) There are low barriers to entry

(a) There are low barriers to entry

(b) MR = MC in the long run.

(b) MR = MC in the long run.

(c) P > MC

(c) P > MC

(d) There are many competitors.

(d) There are many competitors.

'''Intermediate:'''

===Intermediate===

 

3.  A customer to our imaginary homeschool dinner expected to pay $40, but we only charged him $25.  An economist would call the $15 difference the  ___________.  (Hint: see Lecture #10 review list)

3.  A customer to our imaginary homeschool dinner expected to pay $40, but we only charged him $25.  An economist would call the $15 difference the  ___________.  (Hint: see Lecture #10 review list)

9.  Do you support “free trade” or “protectionism”?  Explain your view.

9.  Do you support “free trade” or “protectionism”?  Explain your view.

'''Honors:'''

===Honors:===

 

10.  Look at Figure C (attached).  Assuming it represents the long run, describe what type of industry this is (e.g., monopoly, oligopoly, monopolistic competition, or perfect competition).  Explain your answer.

10.  Look at Figure C (attached).  Assuming it represents the long run, describe what type of industry this is (e.g., monopoly, oligopoly, monopolistic competition, or perfect competition).  Explain your answer.