Principles of Macroeconomics

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Wk 1 Discussion 1:

Opportunity Cost [WLO: 2] [CLO: 1]

As a high school player at St. Vincent–St. Mary High School, LeBron James was already one of the best basketball players in the country. He had been offered numerous scholarships and was considering attending college at Ohio State University, the University of North Carolina, Duke University, Michigan State University, or the University of Kentucky. But after graduating high school, James decided to directly enter the NBA because likely the opportunity cost of college was simply too high. He was selected by the Cleveland Cavaliers as the first pick in the 2003 NBA draft, signing a three-year contract worth almost $13 million, with an option for a fourth year at $5.8 million. Had he decided to attend college instead, James would have incurred an opportunity cost of at least $19 million in forgone income to earn a four-year college degree.

Based on LeBron James’s story, respond to the following components:

  • What is the opportunity cost? Define the opportunity cost in your words.
  • What was the opportunity cost for LeBron James when he determined to directly enter the NBA?

Would you have skipped college if your opportunity cost had been that high? Explain.

Your initial post should be a minimum of 300 words.


Wk 1 Discussion 2:

The Economic Role of Government [WLO: 3] [CLOs: 1, 6]

Economics studies how society allocates its scarce productive resources (land, labor, capital, and entrepreneurial talent). Prior to beginning work on this discussion, read Chapter 2 in the course text, especially examining Sections 2.2 through 2.4, and respond to the following components:

  • Briefly describe the types of economic systems. What is the United States’ economic system and what are the characteristics of this economy?
  • What economic role or functions does the U.S. government conduct regularly?

Why is the U.S. government’s economic role important or unimportant for the U.S. economy? Discuss whether you favor a larger or smaller government role in the economy.

Your initial post should be a minimum of 300 words.

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2 Markets, Governments, and Nations: The Organization of Economic Activity Cem Canbay/age fotostock/Superstock Learning Outcomes After reading this chapter, you should be able to • Identify the four types of productive resources, or factors of production, and the income paid to each for its role in producing goods and services. • Understand the basic economic questions that must be addressed by every economic system. • Use a circular flow model to show the relationships between firms and households in markets in an economy. • Explain and give examples of the basic functions of government. • Evaluate the benefits of specialization and exchange based on comparative advantage. © 2019 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. Limited Resources Section 2.1 Introduction On March 23rd, 2018, Taco Bell surprised everyone in the field of economics by offering college tuition benefits for all 200,000 of its employees, even the part-time employees. In addition, the tuition bills of employees will be paid up front, moving Taco Bell ahead of Starbucks, previously considered to have the best tuition benefits, whose employees have to pay for tuition, take the class, and then submit for reimbursement. But why would Taco Bell make these costly concessions to its employees? There are no studies that show that as people take more college courses they become better Taco Bell employees. Taco Bell has tapped into a key concept for this chapter, that of externalities. An externality is the effect a transaction has on a third party who was neither the buyer nor the seller. A commonly discussed negative externality is second-hand smoke. A toddler whose parents smoke around her is neither the buyer nor the seller of the cigarettes, but she is still affected by the harmful smoke. On the other hand, a coworker can experience positive externalities due to other coworkers’ college education, even if he has never taken a course. Studies show that college-educated employees are less likely to be truant and absent, so the buyers (Taco Bell and the employees taking college classes) are affected, and the sellers (the universities) obviously profit from the arrangement, but others are also affected. For example, an employee can use the conflict resolution skills she learned from her online management course to help all of her coworkers, as well as her customers. Taco Bell believes in the power of positive externalities to help their company grow. 2.1 Limited Resources To examine the process of choice, we can begin by identifying the scarce resources that exist. The productive resources are divided into four broad categories: labor, land, capital, and entrepreneurship. All resources used to produce goods and services fit into one of these four categories, or factors of production. Goods are objects that people value. Services are tasks performed for people. For example, a hairstylist provides a service of cutting a client’s hair; the scissors and styling products the hairstylist uses are goods. Labor Labor is the resource of production with which you are probably most familiar. It is the physical and mental work of human beings. The efforts of a factory worker, a professional basketball player, a university professor, and a financial manager are all labor. Jack Hollingsworth/DigitalVision/Thinkstock Why do you think services, such as hairstyling, are a limited resource? Which factors of production are being utilized here? © 2019 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. Limited Resources Section 2.1 Wages are the payments labor receives for its productive services. Some labor is valued (and paid) more than other labor. Why? One reason is that some labor is more productive. Workers are born with different talents and abilities: Some are more intelligent; others are physically stronger or better coordinated; still others have artistic or musical ability. Laborers can also be made more productive by devoting money and time to improving their skills. Individuals invest in their labor skills by going to college, serving as apprentices, or practicing. Economists refer to this development of labor skills as an investment in human capital. Human capital consists of knowledge and skills that increase labor’s productivity. A large part of wage differences can be explained by differences in human capital. Land The second resource is land. Land, to an economist, is not just rocks and soil but all natural resources that can be used as inputs to production. By this definition, land includes minerals, water, air, forests, oil, and even rainfall, temperature, and soil quality. One clear example is the land that farmers use to produce crops such as apples or avocados, but the irrigation of the crops would require water, which would also be considered a land resource. The payments made to this factor of production are called rent. Capital The third resource, capital, is defined as all resources used in production that are human inventions rather than resources found in nature. As a factor of production, capital includes tools, factories, warehouses, and inventories. When you use a spatula to flip pancakes, the spatula is a capital resource in the production of breakfast. In common usage, capital resources are often confused with financial capital. Financial capital is money lent to individuals and firms to purchase real, physical capital. Economists reserve the term capital for tangible inputs to production, not for financial assets. Capital, like land, receives a flow of income. The payments to capital are called interest. Interest is a payment for giving up present consumption to make resources available for the creation of more capital for future production. Investment is the act of adding to capital. Although the term investment is often used for activities such as buying stocks and bonds, to an economist the term means the creation of real, physical assets, such as machines, factories, or inventories, that can be used to produce other goods and services. AP Photo/Mark Lennihan Amazon CEO Jeff Bezos became the richest person in the world in 2018, with an estimated net worth of $112 billion. Microsoft founder Bill Gates came in second at $90 billion. © 2019 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. Basic Economic Questions Section 2.2 Entrepreneurship The last factor of production is entrepreneurship, which consists of the activities of combining the other productive resources to produce goods and services, taking risks, and introducing new methods and new products (innovation). Entrepreneurs combine other resources by buying or renting them to produce a saleable product. The reward for innovation, risk taking, and organization is profit. Profit is difficult to measure in practice because it is whatever is left over after paying for land, capital, and labor. Accountants frequently count profit as the amount of money left after the bills are paid. However, this measure is likely to overlook such opportunity costs as the value of the owner’s labor (wages) or the return to the owner’s capital (interest). Key Ideas: The Four Factors of Production • • • • Labor is paid wages. Land is paid rent. Capital is paid interest. Entrepreneurship is paid profit. 2.2 Basic Economic Questions The process of choosing how to allocate scarce resources can be broken down into three broad economic questions: • What goods and services will be produced and in what quantities? • How will they be produced? (That is, what methods of production and combinations of inputs will be used?) • For whom will they be produced? (That is, who gets what share of the goods and services produced?) Different kinds of economic systems answer these three questions in different ways. However, people in all economic systems are faced with the problem of how to allocate scarce resources among an unlimited number of wants. The production possibilities curve introduced in Chapter 1 shows attainable levels and combinations of outputs. It does not, however, explain how to choose among these combinations. What determines whether an economy is at one particular point on the production possibilities curve instead of another, and who makes that choice? © 2019 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. Basic Economic Questions Section 2.2 The market provides at least a partial answer to the three basic questions in many societies. A market is any setting in which buyers and sellers meet to exchange goods, services, or productive resources. A market system is an economic system that relies primarily on market transactions to answer the three basic economic questions. What, How, and for Whom? The what question asks exactly what mix of goods and services is to be produced—how many tons of corn, thousands of e-books, hours of entertainment programming, pairs of shoes, and gallons of milk will make up the total national output. It is a difficult enough question in the simple two-product world of the production possibilities curve. With millions of possible combinations of outputs, the what question is extremely complex. In a market system, the answer to the what question is determined by consumers, who “vote” in the marketplace by using their dollars to obtain particular goods and services. In other economic systems, other methods are used to determine what kinds of goods and services are produced and in what amounts. A market economy may result in choices about the output mix that some economists or policy makers find peculiar or distasteful. Many policy makers may not share the public’s taste for rock videos, gambling palaces, country music, or skateboards. However, unless people’s consumption of these items can be shown to be harmful to others, a market society does not pass normative judgment on tastes. Markets produce what people want to buy. The how question asks what input combination will be used to produce the chosen goods and services. Should levees be produced by combining many workers with a few units of capital or by a more capital-intensive method? Is it better to produce soybeans using a lot of machinery, intensely cultivating a few acres of land, or using more land and workers and relatively little capital? Should college students be taught in large classes by professors (highly skilled labor) or in small sections by teaching assistants (substituting less skilled labor)? Such questions must be answered in a systematic way. In a market system, prices guide suppliers and buyers of resources to decisions that maximize profits or minimize costs. The for whom question asks who will get the goods and services produced and how much each person will receive. This is a way of asking which of many possible distributions of income will be chosen. Should the distribution be equal or unequal? Should an individual’s share be based on contributions to production, on need, or on some combination of the two? A pure market system answers this question directly: A person’s rewards depend on contributions to production. Other systems, including a mixed market system, use a mixture of guidelines to determine the distribution of income. The answers to the three questions are not independent of one another. The distribution of income will determine whether there is more demand for bread and milk or luxury yachts. The production process chosen may determine the amount of each kind of output that can be produced. © 2019 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. Basic Economic Questions Section 2.2 The Types of Economic Systems Every society has to find a way to answer the three basic economic questions. The study of the different ways of organizing economic activity, or answering these questions, is called comparative economic systems. One way to classify economic systems is by the method used to answer the three basic economic questions. This classification identifies three broad types of economies: the traditional economy, the command (or planned) economy, and the market economy. Of course, no economy fits neatly into any one of these categories. All economies are mixed in that they all contain elements of traditional, command, and market processes. The Traditional Economy A traditional economy answers the basic economic questions by tradition, or custom. That is, the answers are determined by how the questions have been answered in the past. What is produced is whatever parents have taught their children to produce on the basis of customs. A heavily traditional society is usually not highly sophisticated. Most of people’s efforts are devoted to production of food, clothing, and shelter. Tradition determines what kinds of food are grown, what kinds of clothing are made, and what kinds of houses are built. It also determines what combination of these three is produced in any given period. The techniques of production (how to produce) are also passed on, with little change, from one generation to the next. In many parts of Asia and Africa, the methods of building houses and of farming have been the same for many generations. Traditional societies also have established answers to the distribution question (for whom): They often have rules on how to divide the spoils of the hunt or the fruits of the harvest. Medieval Europe was a highly traditional society, with shares of AP Photo/Amel Emric crops assigned to various claimants. In Many Bosnians have returned to traditional ways such a traditional society, a person’s claim during economic downturns, seizing the chance on society’s resources was determined to attract other people to buy their ecologically primarily by status in the hierarchy, from grown and produced food and wares. a peasant up to a king. You may recognize elements of tradition that persist even in modern industrial societies. An example of this can be seen in the country of Bosnia and Herzegovina. Traditionally, Herzegovinians breed goats and sheep for the production of cheese and wool. Because of the country’s economic crisis in the early 2000s, many of Bosnia and Herzegovina’s citizens returned to these traditional ways of production. © 2019 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. Basic Economic Questions Section 2.2 The Command Economy A command economy, or planned economy, answers the basic economic questions through central command and control. A central planning authority makes all decisions regarding what and how to produce. Individual production units receive detailed plans and orders that carry the weight of law. The question concerning income distribution is answered in the process of determining what and how to produce. The central planners also set wage rates and levels of production. This planning process was the primary method of organization in the former Soviet Union, as well as in China before the rapid movement toward market economies in the late 1990s and early 2000s. Planned systems are disappearing very rapidly. North Korea and Cuba still make extensive use of central commands, but even these nations seem to be inching toward the use of markets to allocate goods. For example, following President Barack Obama’s visit to Havana in March 2016, the Cuban government began to allow cruise ships to dock at Cuban ports and changed several laws to attract more foreign investment (William Davidson Institute, 2016). In any economy, people plan. That is, they think about the future and prepare for it. In a traditional society, people plan for a future that will be much like the past. In a command economy, the government plans how to answer the production and consumption questions for society. This kind of planning is very different from the individual planning that goes on in a market economy. The Market Economy The third type of economic system is the market economy. By definition, a market economy relies on incentives and the self-interested behavior of individuals to direct production and consumption through market exchanges. In practice, consumers are able to “vote” with their dollars in order to determine what is produced and sold in a market. Suppliers primarily determine how to produce. Since suppliers are self-interested and seek to maximize their profits, they tend to combine resource inputs so as to produce a good or service at the lowest possible cost. The answer to the how question depends on the prices of productive resources. Suppliers will use more of abundant resources because they are relatively cheap. In China, for example, the booming population leads to labor being relatively cheap, so manufacturers in China may choose to have products made by hand, instead of using more expensive machinery. Goods and services are distributed to consumers who have the purchasing power to buy them. Households that have more purchasing power (because they own more valuable productive resources) receive more goods and services. The quantity and quality of the labor skills an individual sells are the most important determinants of individual income. In 2017 about 51% of personal income in the United States was wages and salaries (Bureau of Economic Analysis, 2018). People with higher earnings have more “votes” in the form of dollars spent in the marketplace. © 2019 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. Basic Economic Questions Section 2.2 One essential condition is the institution of legal rights to a specific piece of property, including the rights to own, buy, sell, or use it in specific ways; these rights are collectively known as property rights. In a command economy, almost all property belongs to the state. In a market economy, however, private property and property rights play an essential role. Markets will only function if individual buyers and sellers possess ownership rights to the goods and services they want to exchange. In a market economy, productive resources are owned by individuals. The owners of capital will not invest unless they are certain that they can claim the ownership of that capital and the products that it produces. They also need to be assured that their capital and its interest will not be taken away by the state or by force or violence. Workers will not offer their labor for hire if their right to be paid cannot be enforced or if they know their earnings are likely to be stolen. What a market system needs, then, is a legal system that defines property rights and enforces them against any violations. Defining and enforcing property rights is an important function of government even in a pure market economy. The Mixed Economy Because of the advantages of the market system, even primarily traditional or command economies incorporate some elements of markets. Conversely, the pure market system is often modified to soften some of the harshness of pure capitalism. The blend of tradition, command, and market decision methods varies, but most modern industrial countries, such as Canada, Japan, the United States, Australia, and the nations of western Europe, have mixed economies. In a mixed economy, the basic decision method is the market, but some economic choices are made by government. The goal is to leave economic decisions to the market when it works well but to intervene in the economy when the market outcome is not acceptable. On a macroeconomic level, a high rate of unemployment is an example of an unacceptable market outcome. On a microeconomic level, air pollution caused by coal-fired power plants is an example of an undesirable market outcome. In both instances, some people argue that the government should step in to correct the performance of the mar ...
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Running head: WEEK 1 DISCUSSIONS

1

Week 1 Discussions
Names:
Institution:

WEEK 1 DISCUSSIONS

2
Week 1 Discussions
Discussion 1: opportunity cost

Opportunity cost is simply the loss of alternatives that arise from one’s choices. In
economics, one has to weigh different factors before making a decision or a choice. When one
has a wide range of choices, making the best among them in economic terms leads to the
maximum benefits. However, one will always end up missing out on other benefits that could
arise if they chose the alternatives. The next best alternative serves as the opportunity cost.
One should thus analyze all the choices from multiple perspectives and analyze their
associated foregone returns. Having positive foregone returns, which is the difference
between the value of the choice that one makes and the opportunity cost, means that one made
the most appropriate choice. As a result, it is essential that one quantifies all the benefits in
order to ensure that the value of the foregone returns does not exceed that of the choice that
one makes.
When LeBron James chose to directly enter...

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