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Over 400 years ago, William Shakespeare wrote a play (Henry VI Part II) in which one of his characters exclaimed upon seizing power, "The first thing we do, let’s kill all the lawyers."  It is one of Shakespeare's most famous lines.

Over 400 years ago, William Shakespeare wrote a play (Henry VI Part II) in which one of his characters exclaimed upon seizing power, "The first thing we do, let’s kill all the lawyers."  It is one of Shakespeare's most famous lines.

A smart economist might observe that Shakespeare was expressing the undesirability of transaction costs nearly 200 years before Adam Smith discovered the invisible hand, and over 350 years before Ronald Coase discovered and criticized transaction costs.  Shakespeare knew economics before it was even recognized as a field of study!<ref>Believe it or not, lawyers claim that Shakespeare was actually ''complimenting'' them, because the line was spoken by an enemy of freedom.  See http://www.johnlocke.org/news_columns/display_story.html?id=962</ref>

A smart economist might observe that Shakespeare was expressing the undesirability of transaction costs caused by lawyers nearly 200 years before Adam Smith discovered the invisible hand, and over 350 years before Ronald Coase discovered and criticized transaction costs.  Perhaps Shakespeare understood economics before it was even recognized as a field of study!<ref>Believe it or not, lawyers claim that Shakespeare was actually ''complimenting'' them, because the line was spoken by an enemy of freedom.  See http://www.johnlocke.org/news_columns/display_story.html?id=962</ref>

<the politics of economics, and dependency; "give a person a fish, and feed him for a meal; teach him to fish, and feed him for a lifetime!"; how dependency affects political views>

Let's return for a moment to an important concept we mentioned earlier in this course:  opportunity cost.  Recall what the opportunity cost is: it is the value of the best forgone alternative.  Now consider this: '''''the real price of a good is its opportunity cost'''''.  When someone buys something for $10, the real cost of that good is the best alternative use of that $10.  The real price of watching television for one hour is value of that time if you had spent it in the best way possible.  It may seem like the cost of that hour watching television was $0, but in fact the real cost is the best alternative use of that hour.  The real price of that hour of television watching is your highest hourly wage if you worked, or your future wages made possible by studying harder now.

<deregulation of trucking industry>

Defining the real price of a good in terms of opportunity cost is helpful in avoiding the confusion caused by "inflation".  Inflation is the amount that prices increase each year for the same goods.  Back in the late 1970s, inflation was more than 10% per year.  What cost $10 one year would cost $11 the next year, and over $12 in the third year.

Economists created something called the “Consumer Price Index,” or CPI, to measure changes in basic prices of many goods over time.  It looks at the typical purchases by urban (not farming) families and monitors the change in prices of those goods and services from month-to-month.  It includes the costs of food, beverages, housing, clothes, transportation, medical care, recreation, education, and even services like haircuts.  It then combines all those values into one number.  To make it easier to compare, the values are combined in a way that the CPI for the period 1982-84 averaged “100".  In January 2004, the CPI was 185.2.  You can view all the CPI numbers going back nearly a hundred years on the internet.<ref>ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt</ref> In July 2009, the CPI was 215.351.  Inflation causes it to go higher and higher, as the government prints more and more dollars and cause them to lose their value.

 

 

Demand is determined by price.  Generally, the higher the price for a particular good, the lower the quantity demanded.  Conversely, as technological advances cause reduction in prices, the quantity demanded increases.  Far more people own computers today than when they were first introduced over twenty years ago.  Why?  One reason is because computers are cheaper today.

 

Let’s examine the price of a good.  Does the amount you have to pay for a good at a given time tell the whole story about its price?  Is its true price simply the number of dollars and cents demanded by the seller?

 

Not exactly.  It is a bit more complicated than that.  The relative price of a good is more important than its isolated price.  When you go into a store to shop, you compare prices of different goods before choosing the one you like.  Premium gasoline may look a good deal until the customer sees that regular gasoline is selling for 12 cents less.

 

The real price of a good is its opportunity cost.  Recall what the opportunity cost is: it is the value of the best forgone alternative.  When someone buys something for $10, the real cost is the best alternative use of that $10.  The real price of watching television for one hour is value of that time if you had spent it in the best way possible. The price is thus not $0.  The real price of that hour of television watching is your highest hourly wage if you worked, or your future wages made possible by studying now.

Defining real price in terms of opportunity cost avoids the havoc that inflation causes with prices.  Back in the late 1970s, inflation was more than 10% per year.  What cost $10 one year would cost $11 the next year, and over $12 in the third year.  If a good kept the same price during those three years, then its opportunity cost and real price actually decreased.  Think about that.

By comparing a change in price of a good to the change in the CPI, you can tell whether the real price of the good is becoming more or less expensive.  If the good’s price increases by less than the CPI’s increase, then the good has a real price that is falling.

Economists created something called the “Consumer Price Index,” or CPI, to measure changes in basic prices of many goods over time.  It looks at the typical purchases by urban (not farming) families and monitors the change in prices of those goods and services from month-to-month.  It includes the costs of food, beverages, housing, clothes, transportation, medical care, recreation, education, and even services like haircuts.  It then combines all those values into one number.  To make it easier to compare, the values are combined in a way that the CPI for the period 1982-84 averaged “100".  In January 2004, the CPI was 185.2.  You can view all the CPI numbers going back nearly a hundred years on the internet.<ref>ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt</ref>  In July 2009, the CPI was 215.351.  Inflation causes it to go higher and higher, as the government prints more and more dollars and cause them to lose their value.

Now think about this: if inflation is 10% per year for three years, but one particular good keeps the same price during those three years, then its opportunity cost and real price actually decreased.  Think about that.  An honors homework problem will ask you to explain why.

 

By comparing a change in price of a good to the change in the CPI, you can tell whether the real price of the good is becoming more or less expensive.  If the good’s price increases by less than the CPI’s increase, then the good has a real price that is falling. <integrate into material below>

We are going to spend another week on the supply side: what you would produce if you were the President of a company.  Recall that microeconomics is about supply and demand.  When we are on the demand side, then we are discussing what you would buy as a consumer, and how much you would pay.  When we are on the supply side, we are considering what you would produce in managing a company.  Keep these concepts separate in your mind.

We are going to spend another week on the supply side: what you would produce if you were the President of a company.  Recall that microeconomics is about supply and demand.  When we are on the demand side, then we are discussing what you would buy as a consumer, and how much you would pay.  When we are on the supply side, we are considering what you would produce in managing a company.  Keep these concepts separate in your mind.

===Honors===

===Honors===

8. Suppose you invented fertilizer that is costly to make but has an ever-increasing marginal product.  Suppose you own an acre of farmland in South Jersey, and now must decide between spending your money on buying more acres to use the fertilizer, or making more fertilizer.  Which should you do?  Explain.

8. Suppose you invented fertilizer that is costly to make but has an ever-increasing marginal product.  Suppose you own an acre of farmland in South Jersey, and now must decide between spending your money on buying more acres to use the fertilizer, or making more fertilizer.  Which should you do?  Explain.