hi folks let's cover chapter 2 thinking like an economist you'll notice that this is it says principles of macroeconomics up here you might be watching this in a micro class it turns out that the first four chapters are basically the same in a micro or in a macro class any principals level course that you take we always have to start off by teaching you basically the essence of markets the essentials of markets so that's why it doesn't really matter from using the macro slides or the micro slides because we're gonna be talking about the same stuff if you are in the macro class econ 102 this particular chapter is gonna be very very important we're never gonna walk away from the concepts that we learn here versus if you're in the micro class it's not as important it still is important and you need to master this but we're not going to continuously refer to this these models like we do in the macro class okay so here's a list of what you should be able to answer by the time we're done of course this is not an exhaustive list list it's just an outline and the main two models are the circular flow diagram and the production possibilities frontier so I'll take my time with those two things here you're also also responsible for knowing the difference between microeconomics and macroeconomics I'll talk a bit about that and also the difference between positive statements and normative statements okay so what are we doing there's two primary roles for the economist one is that of scientists where we're trying to describe the way the world is and then one as policy adviser where hopefully we're trying to improve society the second one can certainly involve a whole lot of opinions a whole lot of value judgments on what we define to be an improved world but when we're in this class you want to think dispassionately about this these things we want to try to describe causal relationships rather than have our opinions put into it for example we would assess maybe the impact of increasing taxes rather than saying well we should increase taxes or we shouldn't increase taxes is actually bringing us back to the concept difference between positive and normative statements in fact I'll go ahead and cover that here so I'm not even going to get to those slides I'll just cover it here this last bullet point difference between positive and normative statements or positive and normative analysis positive analysis is the approach we're gonna take in this class describing the world as it is or the way it is not so suppose you're in a room with a white wall in it and I said that wall is white that is a positive statement it's describing the way the world is or if that wall is say not white let's say it's brown or let's say it's I don't know a blue wall and so let's say it's a blue wall and if I said that wall is not white or it is not pink or it's not made of rubber that is still a positive statement it's describing the way the world is or the way the world is not it doesn't have any value judgment in it no opinions in it versus if I said something like that wall should be blue or it should be pink or it should be purple that is a normative statement a normative statement involves opinions it involves value judgments so here's something to do with them positive versus normative taxes are too high that's definitely a normative statement because they might be too high for me but to you you might think no no taxes should actually be higher okay that's a normative statement taxes are 4% that's a positive statement describing the way the world is or if I say they are not 4% or they are not 12% describing the way the world isn't okay so it's important to know that in this classroom especially we're gonna take a positivist approach by describing the way the world is okay so primarily focusing on the scientific method right explaining the world trying to get at causal relationships that's our goal here we are going to make a lot of assumptions a lot of simplifying assumptions some of them may be really ridiculous but it doesn't matter in fact all models are unrealistic yet we can learn a lot from them so that's the whole point of making assumptions is just simplify reality so that we get at causal relationships out what happens if you tweak this what's the impact of tweaking this on this other thing that we care about so for example we're going to study international trade and we're gonna assume that there are only excuse me two countries and two goods which is an incredibly realist and realistic assumption but who cares we're gonna learn a lot from it this model by making this assumption all right so a model highly simplified a representation of a complicated reality some examples of models and their usefulness you at your age you probably haven't used a paper map but even if you think of your GPS we're using Waze if you're using your Apple or Google Maps it's still fundamentally a model it's assuming a lot of reality away because it's trying to get at just the point of the map the point of a map is to get you from point A to point B so we don't need to see all the people in the map we don't need to see all the trash we don't need to see all the mailboxes and where all the trees are right we just need to see the roads to get us from point A to point B so a road map makes a lot of assumptions about reality assumes a lot of things away and it helps us achieve that objective of getting from point A to point B lots of models are super useful if it weren't for this silly looking model made of plastic we wouldn't have modern medicine we wouldn't have modern aviation and then this is just being silly okay our first model the circular flow diagram circular flow diagram is basically the essential structure that any economy has it doesn't matter if we're talking about the economy of California or the economy of the United States the economy of Zimbabwe or if when we go and you know colonize Mars guess what Mars will also have this structure it's a visual representation of an economy it includes two flows and this isn't listed here in the slides one flow is gonna be the flow of dollars of money dollars if you're in the u.s. many the flow of money the second flow is gonna be the combined flow of both goods and services and factors of production again goods and services and factors of production and we'll get into what those things are in a second we're gonna assume that we have two economic agents we call them economic agents or we can call them actors they are households and they are firms so this is gonna be the simplest version of the circular flow model and that they interacted two markets one market is the market for goods and services and the other market is going to be the market for factors of production goods and services are the output of the production process factors of production or what we call the inputs into the production process and there are four broad categories of factors of production think of the factors of production once again as inputs into the production process because that is what they are we have four types by the way factors of production has a few synonyms we can call them factors of production sometimes we just call them factors we can call them inputs or we can call them resources and of course my tablet is going to be acting up here because why wouldn't it when I'm recording of course it would so again we can call them factors we can call them inputs or we can call them resources so these terms are used synonymously there are four types anything that is used to produce can be categorised into one of these four bins there's labor and that's basically think of your body right your physical body being able to lift a box being able to hammer something right that's labor okay usually labor we measure them in hours so we talk about labor hours rather than laborers workers the reason we prefer to look at labor hours is because labor hours are comparable the output from an hour is comparable if I work an hour versus you work an hour and we compare who produces more who produces less that's comparable that unit of measure versus if we say a worker versus another worker if I work six hours and you work ten hours our output is not comparable okay so we'd prefer to look at labor hours although this textbook does sometimes just look at laborers or workers just remember that labor hours is the better unit to look at labor is denoted by the letter L by the way another factor of production is what we call capital and capital would denote within that letter K we don't use C because C is a big important letter we use to represent an important concept known as consumption something we focus a lot of in a macro class so capital are basically buildings tools equipment so again things like tools things like a building basically capital is anything that is produced to produce something that is produced to produce to help us produce something that is not in its natural state it had to be produced in order for us to use it to produce so machines would fall in this as well and if you want to put in parentheses here physical capital you can the reason you might want to do that is because we have a different type of capital known as human capital that we'll get to in a second I'm in fact we can cover that already here human capital and we denote it that with the letter H and so anytime I say just capital I mean physical capital but if I mean human capital I don't get rid of the word human I'm gonna keep that in their human capital human capital is basically what's inside our noggins or inside our heads right so it's basically our education for example our skills our experience or expertise those things would be part of human capital okay and again that helps us be productive if I didn't have the education that I have I wouldn't be able to this lecture okay so labor capital human capital and then the last thing is what we call natural resources and we use the letter n to denote that so land air water anything in its natural state that is used to help us produce anything is what we call natural resources okay so these are the four broad categories if you've taken an econ class before especially if you took one in high school they might have included a category known as entrepreneurship well we're gonna bundle that here because entrepreneurship does give you the ability to you know be more productive because it's kind of like that driver that's inside of you right I don't know if it's in the head or if it's in the heart I don't know where it is it's somewhere I just know I don't have a lot of it which is why I like to teach right I like to be in the ivory tower but it does help us be productive so we're gonna bundle that or envelope that under human capital here so we've got four things that help us produce these are our factors of production and think of production as basically being like this magical black box that we're going to call the production function production function okay and into the production function and go the inputs also known as factors also known as resources also known as factors of production and out comes the output all right whatever it is you produce you put it stable so put in some you know some wood or carpenter and some nails and a drill and into this magical black box and out comes the table or out comes the the home right so inputs go in outputs come out okay so this is what we call the production function and there's a few words that we use quite differently than they do outside of this classroom one of those words we've actually already covered one of those words is the word capital a capital outside of an econ classroom when you hear the word capital they mean cash money that's not what we mean in this classroom I'm not talking about cash I'm not talking about money okay my capital I mean buildings tools equipment right things that are produced to help us produce for example the capital that I'm using to produce this lecture is the tablet before me right now my headset my keyboard right that's capital things that are produced that are helping me produce this lecture okay so that's one special word throughout the semester we'll have a collection of special words I'm not going to keep a list but it's important that you understand the definitions we have in this classroom versus the definitions that you're used to outside of this classroom another one of those words is the word technology and technology out there they mean you know if there's a technological improvement they're like it's a faster machine or the iPhone 10 or the iPhone X right for technology in this classroom it actually does not mean the latest and greatest fanciest shiniest thing you know the next machine technology is basically knowledge our knowledge of how to do this process of how to convert inputs into outputs so if an economy experiences technological progress that means we got better at this process it does not necessarily means mean we have better machines or faster machines it's just that our societal level knowledge improved at how to convert inputs into outputs so let me give you an example let me redefine technology technology is knowledge of how to convert inputs into outputs and so here's an example of technological progress okay and by the way you'll always see this line cutting across because what I'm using here is actually a PDF and I just have a bunch of pages if you look up there you see have one out of twenty pages now I'm going to page two because it's a lot easier then you know to clear the board every time so I'm just gonna be paging through a bunch of pages here and so technology if we if we experience technological progress we do not have to have any machines involved or any new machines a great example of this is Henry Ford's assembly plant or the assembly line I mean an example of technological progress that didn't even involve any new machines so let's say initially you know for Henry Ford's assembly line that there were five steps into the production process maybe step one was I don't know here and step two was over here you had to go there and step three maybe you had to go outside and it was over here and then I don't know step four was over here and then step five was over here so this is a great big mess right it's opportunity there's an opportunity here to bump into a lot of other folks or to introduce a lot of frictions in the production process so Henry Ford sat down one day and thought about it and realized well actually what if I I Henry realign the production process and I set it up so that these steps are adjacent to each other okay maybe step one is you know we can start here if we want and then what could put step two here and maybe step three did have to go outside sound like it did before and then step four is here and then step five is here right all Henry Ford did was realign the production process he did not add any machines had the same machinery in the same machinery the same amount of people just realigned the setup and because of that it eliminated a lot of frictions in the production process and therefore became more productive this is a perfect example of technological progress where our knowledge of how to produce improved and I'm showing you that it doesn't have to involve any new new machines any fancier machines use the same things that you have just realigned them again an example of technological progress and so now we can talk about the circular flow diagram remember the circular flow diagram is the simplest representation of an economy we have two economic agents households and firms and they're going to interact in two markets remember market is anything that it has at least one buyer and a seller so that we in order to have a market we need at least one buyer and one seller so that they come together in exchange actually they don't even need to come together right they don't need to meet they don't need to know each other nor care about each other the fact is or the point is that they're just going to trade in some good or some service okay so our circular flow diagram here's our economic agents we can put households over here and the firm's over here it actually doesn't matter where you put them just wherever you put them just put them in opposite positions because then that helps us draw the circular flow diagram so I could have put households up here and firms over here I could have put firms over here and households over here so this isn't something you want to memorize the way it's presented in this slot in this slide deck or in the textbook you want to understand the flows in fact be prepared for that because I may switch them up and I'm gonna ask you to identify the flows which way does this flow from you know does it go from here to here or from there to there okay all right so we have households and we have firms and they interact in the market for goods and services and factors of production so in the market for outputs goods and services and the market for inputs the factors of production households are the owners of the inputs and they're the owners of the factors of production we own our labor we own what's inside of our heads right our capacity to think our education or experience or skills we also own the tools the buildings and the equipment the capital and you may say well no households done own that the firm owns that and I'm gonna say okay yes but who owns the firm's fundamentally it's people right either the business owner or the shareholders so it is households that own the capital same thing with the natural resources maybe the land that a building is on it may be under you know IBM incorporate its name but who owns IBM it is people it is households behind IBM right shareholders so households are the owners of the factors of production and they're the ones who want to buy and consume the goods and services the firm's on the other hand they need the factors of production to produce right so they're going to be the buyers or the renters of the factors are action and they're gonna be the sellers of the goods and services that the households need so they interact in two markets just like households and firms can be flipped so can the markets just put them in opposite position I happen to put factors of production market down here the factor market and the goods and services market we're gonna put up there so market for factors of production and they can come together households and firms in exchange in the market for factors of production in the labor market for example where households provide their labor to the firms and in exchange of course the firms have to pay the households as you'll see in a second so they're gonna interact in two markets here we go households are providing their inputs their factors in this market whether it's a physical marketplace or not it could be online where you see a job ad that's the firm reaching out to the worker right the firm is the demand er of Labor the worker is a supplier of Labor providing the factors to the firm that the firm is going to use to produce we're not doing it for free as households right we have to get paid so here's the payment payment of wages to labor rent is what we call the payment to capital to tools building and equipment we call that rent and then profit to shareholders right if it's that's how they're getting their payment and so along comes the payment exchanged in this market whether or not it's a physical market and then the income goes to the household all right so households are providing the inputs and in exchange they're getting paid now they also interact in the market for goods and services ask yourself which way is the money flowing and which ways the real variable flowing meaning the thing you can practically touch right the good or the service the service you can't touch but it is a real quantity yeah and so there goes the many the households are paying for the goods and the services and in exchange of course they're going to get the goods and services from the firms that the firm's produced using the factors at the household right so this is our circular flow diagram notice we have two flows you can call it the red flow and the green flow in my slides here or more importantly it is the flow of money which you see out here in green one complete flow right the payment from by firms to households for the factors and then households get that as income and they use that to spend on the goods and services that the firm provided to them so one flow the green flow is the flow of money I could have drawn the green flow in here so it doesn't matter where you draw it whether you draw it outside the outer circle or the inner circle doesn't matter just understand which way the money flows the second flow is the flow of real variables and remember earlier I said that that second flow has two parts one of those are the inputs that's half the flow the other part of that real variable flow are the goods and services so households provide the factors which are then used to produce the stuff that households end up getting from the firm's all right so this red flows what we call the real flow and it includes inputs into the production process and the output and by real I mean you can basically touch it okay money is not real you're gonna say well I can touch money it's in my pocket that's not what I mean what I mean by real is that that's what has value money you'll learn in a macro class when you take it or you'll learn this semester if you're taking macro now is that money is not what we call real in economics there's another special word an econ real money is what we call nominal that it's true values not how many monies or how many bills you have in your pocket it's real value is what you can buy with it that's the real value of the money in your pocket or in your purse okay so anything you have just in plain old dollar sign terms that's what we call nominal so for example the wage that you earn every hour that's nominal if you make twelve bucks fifteen bucks 20 bucks an hour that's nominal that's not the real value of it the real value of that is the meal you can buy with that the movie ticket you can buy with that that's the real value of that money that you're making okay circular flow diagram not too hard super important for macroeconomics we're gonna keep on coming back to the circular flow diagram this is why the circular flow diagram is so important if you're taking macro like I said we're gonna keep coming back to this if you're taking micro maybe this will give you the incentive to take macro just give you a taste of it so money's flowing and goods and services are flowing and suppose that households for whatever reason are feeling pessimistic about the economy so they're not feeling good about the future they're worried what are they gonna do they're gonna stop spending as much right so their spending is gonna go down they're not gonna buy as much stuff because they're worried about the future and if they don't buy as much stuff then that means firms don't need to make as much stuff because again the households are buying less stuff so if firms don't need to make as much stuff then households their factors of production aren't gonna be needed as much anymore so households are feeling pessimistic they're spending less firms start to notice they're gonna be like hey we don't need to make as much stuff so if we firms don't need to make as much stuff then that means we need fewer factors of production and if we need fewer factors of production that means households are gonna get less money because not as many factors are being employed and if households get less money then that means there's less money to spend on and if there's less money to spend with then that means firms are gonna make even less stuff and if firms make even less stuff then they're gonna need even fewer factors and if they need fewer factors and that means that's less income to households and here we go we start spiraling down we start circular flowing it so that's basically them describing a recession that is a demand-side recession it could go in the opposite direction as well the economy can expand for numerous reasons one reason can be that consumers are feeling optimistic about the economy if they're feeling optimistic they're gonna spend more if they spend more firms need to make more stuff since they need to make more stuff they're going to need more factors more factors means more income to a household Maurine comes to households means more money to spend with which means they're gonna buy more stuff so firms need to make even more stuff which means they're gonna need more factors and if they need more factors that means there's more payments going to the household and home we start spiraling upward right we start getting into an economic expansion right a boom versus the previous one which wasn't bust right so the circular flow diagram just said even in this simple diagram here we can talk about expansions in the economy and contractions in the economy which by the way is the entire point of econ 102 macroeconomics all right on to the production possibilities frontier also known as the PPF and so formal definition a graph that shows the combinations of two goods the economy can possibly produce given the available resources and the available technology so right now you're busy reading that let me get rid of it okay PPS listen to those words production possibilities frontier production possibilities frontier by frontier we mean maximal the most the most wet the most of our production possibilities what can an economy produce what is the most of combination of two goods we're gonna limit it to two goods because we have a two dimensional plane here on this tablet and in in anything I present to you so we'll limit it to two goods but this can be we can start using vector analysis and get into fancy math to start talking about multi-dimensional goods and services but we won't we'll keep it to two goods here because we don't lose the less and if we keep it on two dimensional space here and so production possibilities frontier the most frontier that an economy can possibly produce production possibilities so produced by the way not consumed we're not talking about consumption we're talking about production and think about what determines what we can produce we need to know what our resources right what are factors of production how many tools do we have how many workers or worker hours do we have of a what's art what are our natural resources what level of education and skills and expertise do we have those things help us produce but also our knowledge of how to use those things that determines how much we combine determines how much we can possibly produce so now let's go back to this definition it shows the combinations of two goods that the economy can possibly produce given and if you're writing this down or if you printed the slides underline that circle that highlight that given what given its available resources and it's technology that is what determines what we can possibly produce okay okay so in our example we're gonna say we're producing computers and we by the way we're gonna be stuck on computers in wheat for a while for this chapter in next chapter by the time we're done with Chapter three you're not gonna want to hear the word computer or the word wheat ever again because we're gonna focus on this for a while so our simplified reality the assumptions we are making is that we're producing two goods computers and wheat and we're gonna assume we only have labor as our input again simplifying assumptions but just to get at the heart of the lesson here our labor is gonna be measured in hours okay we have to say how much we have a bit so we're gonna assume that in this particular economy we have 50,000 labor hours per month available for production so these are what we call our Givens this is what is given to us in our example given our Givens we can talk about what we can possibly produce the different combinations of two goods computers and wheat that this economy can possibly produce given our known technology and our technology our knowledge of how to convert inputs into outputs goes like this to make one computer we know how to make one computer by using a hundred labor hours we know how to make one ton of wheat and by a ton I mean a metric ton or an imperial ton not a ton as in a shitload so a ton of wheat requires ten hours so this is information again on our and our labor hours which is our input we can distribute it we can split it up in different ways we can devote all of our hours 50,000 hours to labor I'm sorry to computer production or to wheat or we can split it up 5050 8020 6040 61 and 39 percent right so there's a bunch of different ways that you can split up your labor hours I just happen to choose five different ways to split up your labor hours and each time we're going to ask ourselves when we do split up our hours given this information how we decide to allocate our resources in this case allocating all of our hours towards computer production leaving no hours available for wheat and given our knowledge then what are the what's the most amount of computers we can produce and we'd also again given the allocation of our resources this column here is basically talking about the allocation of resources and so given that we devote all of our hours for its computer production and that it takes a hundred hours to make a computer well fifty thousand divided by a hundred gives us at most we can make would be five hundred computers and since we didn't leave any hours for wheat production then we can't make any wheat at all we can split up our hours differently like this again there's a bunch of other different ways we can split up our hours but these are the ones I'm presenting you and then asking ourselves the same questions given that computers takes a hundred hours and we takes ten hours what are the different possible combinations of computers and wheat that we can produce so we can fill that in if we split our hours 80% going to its computers 20% going towards wheat that means 40,000 hours to computers 10,000 hours going towards wheat then that most we can make would be 400 computers and then a thousand tons of wheat fill in the rest the last one being we've devoted all of our resources our labor towards wheat production all 50,000 hours leaving no hours left for computers which is why we can't produce any computers but we can produce at most 5,000 tons of wheat so now we're going to take this information and use this to plot our PPF remember our PPF is going to be a graph that shows the different combinations of two goods computers in week that an economy can possibly produce given its resources and its technology so here we go I took those two columns have them here and we're going to plot our PPS we have computers on the x-axis we have wheat on the y-axis that happens to be the way we decided to plot it we could have flipped those rolls we could have put computers up here and wheat down here who cares doesn't matter as long as you're consistent if you're especially if you're comparing one country's PPF to another country's PPF if you put computers down here for this country then you better do the same thing for the other countries PPF okay so let's plot each of these points and you should know how to do that already connect the dots this ladies and gentlemen is our production possibilities frontier listen to those words production possibilities frontier the maximal amount those combinations of two goods the most we can as far out as we can go on this plane all right we cannot possibly go out here anything on here we can produce at this point we have what 2500 tons of wheat and 250 computers over here we have 500 computers no wheat anything on here is within our possibilities and anything inside of it is as well we can choose to be here we can choose to be here as well so anything in here is possible anything on here is possible this is the frontier this is in fact the PPF out here we can't possibly produce out here out here we call this point out here not feasible or unattainable and we'll get to that in a second we are talking about production folks we are not talking about consumption that being said if we do not trade with the rest of the world our consumption possibilities frontier is our production possibilities frontier because our consumption is constrained by our production think about what I just said our consumption is constrain in other words limited by our production if we don't trade the imagine you're off in a cabin somewhere because you know you want to live off the grid and you want to be self-sufficient okay fine have fun don't take me with you I don't want to go think about that though if you don't trade with anyone then anything you consume you must produce you want to eat go catch that fish you want clothing you got to make it yourself you want a car good luck with that one maybe you can develop something with wheels right I don't know about a motor but good luck okay so your product your consumption is going to be limited by your production right same thing here and that's what we're gonna see in chapter three chapter three is titled interdependence and the gains from trade and we're gonna see a very beautiful outcome that because of trade we as an economy whether it's the United States or the city of Santa Barbara or the city you know the state of Alabama that the beauty of trade is that trade allows us to consume beyond our production possibilities which would not be possible otherwise right otherwise you'd be like that person going off to live in a cabin somewhere by themselves not trading with the rest of the world okay let's move on here all of my slides are gonna have what I call active learning modules so there's the lesson and there there's another example so I'm gonna skip this here in fact almost always I'm going to skip it that's up to you let me actually go to my whiteboard here okay so our ppps let's talk about efficiency and feasibility so let's suppose that we're making again computers and wheat and that this is our PPF and i failed there you're almost shoot don't laugh at me there we go and this is our PPF or production possibilities frontier let's identify different points on here well I'll identify a point this one which I'll call point a a point like this one which I'll call point B and a point like this one which I'll call my to see okay B we say that that's a feasible point yay given our resources and our level of Technology our knowledge of how to convert inputs into outputs being is a feasible point we can possibly produce a combination with that many computers and that much wheat so we say that B once again is feasible it's possible for us to be there a is also feasible where we have you know this many computers and this many tons of wheat so a is also feasible it's possible C however we can't possibly produce there because we do not have the resources and ER the technology to possibly produce that many computers and that much wheat so we say that C is not feasible or you can also say that it is unattainable it's impossible for us to produce out there unless we have the resources after the technology to get out there so that's feasibility so basically anything on the PPF or inside of the PPF is feasible efficiency is something else if you're being efficient you are fully taking advantage of your knowledge of your technology and you're fully utilizing your resources so a point like a that is considered to be an efficient point so I'm gonna say feasible and efficient and I'll show you why in a second so a is feasible and efficient if you look at a if you're at point a let's say you want to produce more wheat if you can't be there you can't be at that point you must give up some computers you have to you have to you have to you have to so if you're being efficient that means you're fully utilizing your resources and taking advantage of your technology so if you want to make more of anything for example we you'll have to give up the production of something else in other words efficiency means you will face a trade-off whether you're producing more wheat or if you want to produce more computers you can't possibly get to this point here to produce more computers you have to give up some wheat production so if you're operating efficiently you face a trade-off being on the frontier means you face a trade-off so anything on the frontier is an efficient point a point like point B however is not an efficient point B is in efficient because you don't face a trade-off here if you're at point B you can go and produce more wheat without giving up any computers you're still producing the same amount of computers at that point the only way for you to do that it must be that you're not fully realizing your potential essentially you must there must be some resources that you're not utilizing there must be some idle resources that you're not utilizing or maybe you're not taking advantage of your technology all right so you can produce more of one of the goods without giving up some of the other same thing with if we wanted to produce more computers and go to this point that's fine we didn't have to give up any wheat okay so at point B or anywhere inside of the PPF we are operating in efficiently the question of efficiency is not even addressed at point c because we can't even be out there right that's an impossible point so feasibility and efficiency make sure you understand those two things another thing I want to point out now is what we call economic growth if you hear tapping in the background that's my dog walking around I need to cut his toenails I hope you don't hear that you might though um economic growth and that's how I'm growling and there he is okay I'm gonna pause I'll be back all better now he's sitting on the couch I hope that made you laugh anyway um so economic growth this isn't the slides but there's nothing like watching me do it to get the point across so economic growth when we say economic growth in this classroom it means something very specific okay economic growth is basically an expansion of the PPF of production possibilities so let's say we make good X and good Y and this is our PPF that given our resources and our technology this is all possible combinations of goods x and y that we can possibly produce to can't give our resources and technology and if we experience economic growth that means that our PPF has expanded ok so this here this is economic growth economic growth need not be balanced it could be imbalanced in fact it's much more realistic for it to be in balance so if that's our original PPF and it grows like that way more realistic because maybe we got factors that were way more conducive for the production of X than they were for the production of Y so it could be in balance you can either be in balance like that or the imbalance can be in the other direction like that ok obviously touching the axes there but oh well so I'm just I just happen to show a rather parallel shift there so economic growth again is an expansion of production possibilities the only way that can happen is you must either get more factors not of all of them it could be just one maybe more laborers maybe the education level stays the same same amount of land whatever you just have to get more factors or a more of a 1 factor and or an improvement in technology your knowledge can improve your knowledge of how to convert inputs into outputs that's what leads to an expansion an expansion of production possibilities so when we say economic growth in this classroom it means something it's important this is also a phrase that is special in this class and here's why because out there outside of this classroom they often confuse coming out of a recession with economic growth for example if we're at a point like in here that's what a recession would be we are not at our frontier we're not at our maximum point we are not utilizing all of our resources there is unemployment and so if we start coming out of the recession whichever way we travel and we start heading in that direction they call that in the newspapers they'll call that economic growth and an economist is like whoa whoa whoa no that it's not economic growth our production possibilities did not expand it is a recovery so do not confuse the two moving on the PPF conveys the concept of opportunity cost remember earlier at Point a I showed you that you face a trade-off if you wanted to produce more wheat if you're on the frontier you're giving up the production of some computers if you wanted to produce more computers you're giving up the production of wheat and so the slope of the PPF is gonna convey what we're giving up right opportunity cost by definition we said the true cost of something in Chapter one the true cost of something is what we give up to get it and in this model if you make computers you give a bleep if you make wheat you give up computers assuming you're operating efficiently so if we find the slope the slope is telling us what the opportunity cost is of the good okay so it's important to understand that it's important for you to get comfortable with the measuring of the slope moving along the PPF again is going to shift these resources just like I said you want to make more weeds you have to allocate your labor towards wheat production and since you were on the frontier that means you need to take some of that labor away from the production of computers to make your wheat and so let's go ahead and look at that in our PPF example so here we go we have exactly what we plotted earlier remember our maximum on the two extremes were if we devote all of our resources towards the production of computers we can produce 500 computers in no wheat and if instead we devote all of our resources towards the production of wheat at most we can make would be 5,000 tonnes of wheat and no computers at all finding the slope of this right we know that the slope is the rise over the run and so for every hundred computers that we produce we're giving up a thousand tons of wheat that should make sense to you because remember for every one computer we used a hundred hours and we could have instead used those hundred hours to make ten tons of wheat because our story says that every tonne of wheat takes ten hours so if we for every computer we're giving up ten tons of wheat so if we make a hundred computers we are giving up therefore a thousand tons of wheat ten times as many right and again our technology getteth gets at the heart of that trade-off right because computers took a hundred hours wheat takes ten hours every time you make a computer you are not making ten tons of wheat writer laborers can't have one hand in computer production and the other hand in wheat production right you can't be in both industries at the same time obviously we can find the slope by getting the rise going from this point to this point so we could say what the rise would be what negative 5,000 and then the run would be 500 in that case going back to the tablet to look at this and to look at what the slope is telling us right my claim is that the slope of the PPF in fact the absolute value of the slope of the PPF absolute value meaning we're gonna remove that any negative sign that shows up which skews the slope is going to be negative or because clearly you can see that plot with a negative slope and we know that the slope is the rise over the run right my claim is that when you take this slope that the absolute value of the slope will be the opportunity cost of the good on the x-axis when you make the good on the x-axis whatever number you get here is what you're giving up in terms of the good on the y-axis okay and so again what you're giving up is going to be in terms of the good on the y-axis and so we find the slope here why just find the slope we get going from this point to this point over here our rise is negative 5,000 our run is 500 so we get negative 10 economists see the negative as a cost that's what the negative is telling us to gain those 500 computers you gave up that's what that negative sign is telling us you gave up 10 of whatever's on the y axis in this case wheat units of wheat okay and that should make sense once again because every computer that you make took a hundred hours you could have used those hundred hours to make 10 tons of wheat because a tonne of wheat takes 10 hours and so if we get the absolute value of the slope then we can basically say which gives us 10 we can say hey the opportunity cost of computers is 10 10 wet 10 tons of wheat again the absolute value of the slope of the PPF will always be the opportunity cost of the good on the x axis similarly if you get the absolute value of the inverse of the slope that says inverse my claim is that that's the opportunity cost of the good on the y axis inverse meaning the reciprocal inverted reciprocated so if you find that we just reciprocate it 500 goes up here negative 5,000 goes down here get the absolute value we get 1/10 right for every and so my claim is that this is again the opportunity cost of good-y the opportunity cost of good-y in our case which happens to be wheat is 1/10 1/10 watt 1/10 of a computer or whatever's on the x-axis so every time you make a ton of wheat you are not making a tenth of whatever's on the x-axis in this case it is a computer and that should make sense if you make a ton of wheat you use 10 hours you could have gone instead a tenth of the way into the production of a computer because the computer takes the hundred hours right in our simplified example here all right so making sure you understand what the slope is conveying is important if you need the slope of the good on the x-axis just take the absolute value of the typical slope that you find all the time if you need the opportunity cost of the good on the y-axis get that slope and invert it this PPF I've been drawing is what we call a linear PPF linear PPF it's a line basically and a line as you know has the same slope everywhere that it doesn't matter where you are whether you're going from you know here to here or from here to here that the slope is the same everywhere in other words in economics we're interpreting this as the opportunity cost the opportunity cost is the same everywhere it doesn't matter where you are on the PPF that's actually very unrealistic to have a linear PPF because that means that we have a constant opportunity cost so linear PPF means that you have a constant opportunity cost in both goods right because the slope is the same whether you're going from the top to the bottom or from the top so it's from the bottom to the top I remember we invert that slope to find the opportunity cost of good-y and so this is highly unrealistic because our resources are different right it's assuming that when you go from this point to this point it's the same type of site productivity of your inputs as when you're going from this point to this point but that's so unrealistic because our inputs are different just think of labour our hours are different my hours I'm different from you we're not productive at the same rates or forget that even think of just me my first hour isn't doesn't have the same productivity as my second hours my third hours my eighth hour I think of studying your most productive the first few out of the first hour the second hour then eventually you start kicking in to diminishing returns right you get to the fourth fifth six hour your brain is all twisted right so even within one person productivity levels vary so it's unrealistic to assume that the trade-off is the same everywhere because our resources are different a much more realistic PPF is one that has what we call a bowed out PPF this is about that's a B bowed out PPF this is much more realistic so if we have good acts and good Y I'm gonna draw the bleep EPS and actually I think in the textbook we used would we use we used beer and bikes so I like this example because it's actually pretty cool um let's say we're at one extreme you can pick any extreme doesn't matter which one let's go to the top so an effect center bar is a good example of this potential here combination especially IV right so we're a bunch of drunks we're up here right we could devote it all of our resources towards producing beer okay and so all of our Labor's up there if we want to produce some bikes let's say we want to produce bikes hold that marginal amount fix that vertical that horizontal distance hold it fixed okay we're gonna make sure that's the margin if you want to produce this additional marginal amount of bikes the zoom in this is how much beer you're giving up initially and let's say you get to this point and we as a society decide Wow bikes are cool let's walk away from beer production and get a little healthy and so we decide to allocate more resources towards the production of bikes and you'll notice that we are now giving up more beer we want to make sure that this run right here that this is the same distance or close to it when I'm drawing it here as the previous one so that we can compare the cost of adding this additional marginal amount of bikes because if I make it too far out that's not comparable right what I give up to produce these bikes is not comparable to the previous marginal amount of bike production and if I make it too short if I just go from there to there that's also not comparable to the previous set this set here right so let's try to make sure it's basically the same size there and so we can compare the cost right the cost of this first batch of bikes is this much beer that we gave up for the second set it's that much beer that we gave up for the third marginal amount we give up this much beer right this much right here and you'll notice that each time to get a marginal amount of bikes to increase bike production by the same marginal amount we're giving up more and more and more beer last one here looks like we get to the edge okay so as we go in this direction we see that the opportunity cost of bikes is increasing we're giving up that's as bikes the opportunity cost of bikes is increasing we're giving up more and more beer the closer we get to the bike extreme or the further we move away from that beer extreme up here and that should make sense because think about it when we send those first few units of labour to go make bikes who are we going to send are we gonna send the best Brewers or they're worse Brewers we're gonna send the worst Brewers those are the first ones that are gonna go make bikes and so when we do that we don't give up a lot of beer but as we start producing more and more and more bikes we start tapping into higher quality Brewers so we're giving up more and more beer as we produce more bikes right so that's why this type of PPF is more realistic because it allows for heterogeneity or differences in the productivity of our inputs in our case of Labor so a bowed out PPF what it's conveying is basically increasing opportunity cost this is way more realistic again because it allows for that heterogeneity or in that variation and opportunity cost by the way that's also conveyed going in the opposite direction so if we were to do go from what I have done here bikes and beer up here the keys by the way to draw it nice and bubbly cuz if I do it too flat then it's kind of like a line and so if we start at you know this point down here and I want to produce some beer make sure now what we're going to compare the margin is adding additional marginal amounts of beer now we're gonna say well when I get this beer what do I give up in bike production that's what I gave up a bike production now make sure that that vertical distance again that marginal amount is basically the same as a previous one so that you can see that the opportunity cost every time I add a comparable amount of a marginal amount the same marginal amount of beer I'm giving up more and more bikes right so going in this direction we see an increasing opportunity cost of beer so about out PPF shows us both an increasing opportunity cost in both directions again way more realistic I want you to know that I want you to understand the lesson here , but we will walk away from this now we're gonna be working with linear PPS because in this class we're not gonna be using calculus to get at the rates of change or to get at the slope of anything that has curves you need to be using calculus and for a principles level course at SBCC are really anywhere we're not going to be using calculus because we want to get at the heart of the economic intuition for those of you that move on to higher level econ in fact the next level econ boom you immediately go into calculus and we stop graphing things and we start looking at functions because again we can use calculus to estimate more precisely the rates of change or these slopes that's it for chapter 2 there's more on normative is positive which you've we've already discussed and you're responsible for and then also the difference between microeconomics and macroeconomics which I did talk about and I think my welcome video or in one of the previous videos that I posted you most certainly can also read about it in the textbook