I may add some more on Saturday, but here is just a brief outline of what we covered.

I)                   What is an economy?

A.    Market-oriented economies vs. command economies

Some vocab

1.      economy

2.      economics

3.      market

4.      market-oriented economy

5.      command economy

6.      black market

B.     The interconnectedness of an economy

II)                The Division of Labor

A.    Why the division of labor increases production

What did Adam Smith say about this?

How do the below factors contribute to increased productivity?

1.      division of labor

2.      specialization

3.      economies of scale

III)              Microeconomics and Macroeconomics

A.    Microeconomics: the circular flow diagram

1.      microeconomics

2.      macroeconomics

3.      thecircular flow model and its markets: goods and services, labor, financial capital

4.      rate of return, interest rate, principal

     We skipped the last one in the chapter 1 presentation, but it came back in chapter 2 with intemporal choice.

I)                   Choosing what to consume

     A.    A consumption choice budget constraint

           1. Budget constraint, opportunity set

B.     Know how changes in income and prices affect the budget constraint

C.     Personal preferences determine specific choices

           1. What is Utility and what is an Indifference Curve?

II)                Choosing between labor and leisure

          A.   Be able to show an example of a labor-leisure budget constraint

B.     How a change in wages affects the labor-leisure budget constraint

C.     Making a choice along the labor-leisure budget constraint.  Can you show the level of income, the amount consumed, the amount of leisure selected, and the numbers of hours you will work.

III)              Choosing between present and future consumption

A.    Interest rates: the price of intertemporal choice  What are the factors that affect interest rates?

IV)             Three implications of budget constraints: opportunity cost, marginal decision-making, and sunk costs

A.    Opportunity cost

B.     Marginal decision-making and diminishing marginal utility

C.     Sunk costs

1.   Definition of production possibilities frontier: a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology.

3.   Because resources are scarce, not every combination of computers and cars is possible. Production at a point outside of the curve (such as C) is not possible given the economy’s current level of resources and technology.

4.   Production is productively efficient at points on the curve (such as A and B). This implies that the economy is getting all it can from the scarce resources it has available. There is no way to produce more of one good without producing less of another.

5.   Production at a point inside the curve (such as D) is inefficient.

a.   This means that the economy is producing less than it can from the resources it has available.

b.   If the source of the inefficiency is eliminated, the economy can increase its production of both goods.

6.   The production possibilities frontier reveals: People face tradeoffs.

a.   Suppose the economy is currently producing 600 cars and 2,200 computers.

b.   To increase the production of cars to 700, the production of computers must fall to 2,000.

7.   The cost of something is what you give up to get it (opportunity cost).

a.   The opportunity cost of increasing the production of cars from 600 to 700 is 200 computers.

b.   Thus, the opportunity cost of each car is two computers.

8.   The opportunity cost of a car depends on the number of cars and computers currently produced by the economy.

a.   The opportunity cost of a car is high when the economy is producing many cars and few computers.

b.   The opportunity cost of a car is low when the economy is producing few cars and many computers.

9.   Economists generally believe that production possibilities frontiers often have this bowed-out shape because some resources are better suited to the production of cars than computers (and vice versa).

10.  The production possibilities frontier can shift if resource availability or technology changes. Economic growth can be illustrated by an outward shift of the production possibilities frontier.

II.   Comparative Advantage: The Driving Force of Specialization

A.   Absolute Advantage

1.   Definition of absolute advantage: the ability to produce a good using fewer inputs than another producer does.

B.   Opportunity Cost and Comparative Advantage

1.   Definition of opportunity cost: whatever must be given up to obtain some item.

2.   Definition of comparative advantage: the ability to produce a good at a lower opportunity cost than another producer.

3.   Because the opportunity cost of producing one good is the inverse of the opportunity cost of producing the other, it is impossible for a person to have a comparative advantage in the production of both goods.

C.   Comparative Advantage and Trade

1.   When specialization in a good occurs (assuming there is a comparative advantage), total output will grow.

2.   As long as the opportunity cost of producing the goods differs across the two individuals, both can gain from specialization and trade.

D.   The Price of the Trade

1.   For both parties to gain from trade, the price at which they trade must lie between the opportunity costs.