NEW- Micro Unit 1 Summary- Basic Economic Concepts

Hey econ students this is Jacob Clifford. Welcome to the microeconomics unit  one summary video [music]. In these summary videos I quickly  explain all the concepts you need for your next quiz, unit exam, or your final exam.

Basically everything you need  to get an A in your class. But I'm going to be going quick. I am  going to be using the AP curriculum.

That's pretty much the same as any introductory  microeconomics course. So if you're a first year college student or you're preparing for the a  level or CLEP exam, it's all the same stuff. This video covers Unit 1 Basic Economic Concepts.

Now before we get started let's do a  quick activity. I want you to make a fist with your right hand. I want you  to put your thumb out to put your pinky out.

So just like this. Here we go  this is round one. Okay, you got it.

All right, here comes round two.  Same thing on both hands. Thumbs out, pinkies out.

Thumbs out, pinkies  out. Try this see how you do. Here comes round three.

I want thumb out  pinky out, thumb out pinky out. Do this. Now there's two reasons why we did  that activity.

The first is this is a great analogy for what you're  going to see in an economics class. Some concepts are super easy like the definition  of scarcity. Duh, I get it.

It's easy. And, eventually things get a  little harder like drawing the production possibly is curve or supply  and demand but they're still pretty easy. But then things are going to get a lot harder like figuring out comparative  advantage or terms of trade.

That stuff is harder and  you're going to feel confused. There's concepts in this class that I'm  going to do fast, but you got to slow down. You got to practice and it's okay  to make mistakes.

You just got to keep doing it until you're  like,, "yeah, okay I got it. " Trust me it's not enough just to watch me  draw the graphs and do the calculations. You're going to have to practice. 

You're going to have to do it yourself. Now the second reason we're doing  this activity is I wanted to find out if you're willing to participate. If I had you do this and you didn't  do anything.

Round two you didn't do anything. Round three you're just  sitting there with your hands not moving, you're probably setting yourself up for failure. If you're not participating then you're definitely  not going to get the most out of these videos.

Because, every once in a while I'm  gonna say stop this video, I want you to draw this graph or do those calculations. And, I promise you I'm not wasting your time. I know the questions your teacher  or professor is going to ask you.

So, when I ask you to stop and practice, go ahead and try those things because that's  what you're going to see on your next exam. And that's also why I created a study guide  that goes along with this video. The Unit 1 study guide is inside my ultimate review packet  and it's free, just sign up for the free preview.

The link is in the description below. And I just uploaded new study guides so  make sure you have the most updated version. So here we go, pause this video go  download and print the Unit 1 study guide.

Have it ready to go and start  the video back up. [Music] Okay here we go! You've got  your study guide, your video, you got your energy and excitement, Let's  jump into it let's learn some economics!

Let's start with a quick overview. There's five big picture concepts that you need  to know in microeconomics Unit 1. Number one, economics focuses on scarcity and how it requires individuals businesses  and governments to make choices.

Number two, society's economic I system  determines what will be produced, how it will be produced, and  how it will be allocated. Number three, the production possibilities  curve shows a different combinations of two goods that can be produced using all  a country's resources to the fullest. Number four, countries that have a  comparative advantage can specialize in the production of specific goods  and trade with other countries at a lower opportunity cost than if they  produce everything on their own.

And number five, marginal analysis  involves weighing the additional benefits and the additional costs of any decision. Now that was the big picture. Now  let's jump into specific topics.

Every economics class starts by looking at  scarcity, the idea that we have unlimited wants but limited resources. Which  means we're forced to make choices. For example, you have to decide who you  want to take out on a date on Friday night, because you definitely can't take two people out.

And, businesses have to decide how many  units to produce or how many workers to hire. And, governments need to decide how  many public services to provide or what policies are best to fight  inflation or to promote growth. Ao when you boil it down, economics is a study of choices and decision-making.

So  that's why you're taking this class. Learning economics is going to  make you a better decision maker. Just look at the highest paid  college majors.

Most of the ones at the top are in STEM but take a  look right here. . .

economics. Oh yeah! When I talk about limited resources a lot  of students assume I'm talking about money, but money is not a resource.

Yes, we use money to make transactions but it's not a resource because you  can't produce anything with it. Instead your teacher or professor is going  to talk about the four factors of production. The four things we need to produce stuff:  land labor capital and entrepreneurship.

Land is anything from mother nature, like  water, minerals, crude oil, or sunlight. Labor is obviously the work that humans do.  Everything you did during your summer job.

For capital there's two types, there's  physical capital and human capital: Physical capital are things like tools  machines and factories used to produce stuff. Human capital is the knowledge experience and  training that makes workers more productive. By the way, that's another reason why you're  taking economics.

You're trying to increase your human capital making yourself more  productive and more valuable to employers. And the last factor is entrepreneurship.  The person that brings together all the their resources starts the  business and takes the risk.

Another thing your teacher  or professor might talk about early on is the difference between  microeconomics and macroeconomics. Macro looks at things like growth unemployment inflation and different policies to  speed up or slow down the economy. "We are strongly committed to  returning inflation to our 2% goal" Microeconomics is a study of small economic units and looks at the decisions  of individuals and firms.

Things like the costs of production the  different kinds of markets and the effect of government regulations like minimum wage. "Fast food work across our state  getting a big raise starting today their minimum wage going up to $20 an hour. " That's what you're going to learn in  this class.

This is microeconomics! Okay that's it for topic 1. 1.

I  know it was super easy. Go ahead and take out your study guide  fill out that section for 1. 1.

In topic 1. 2 you learn about the three economic systems. The three ways to organize and  distribute society's scarce resources.

There are command economies, free  market economies, and mixed economies. A command economy, or centrally planned  economy, is where the government owns the factors of production and decides what to  produce, how to produce it, and who gets it. Since government bureaucrats make the  decisions, the disadvantage is that individuals often have fewer freedoms and  are told where to work and where to live.

But, the advantage of central planning  is that it often reduces unemployment, limits income inequality, and prioritizes  social welfare instead of profit. Now in a free market profit is everything! :) Privately owned businesses produce  goods and services and compete with each other to earn your money.

To earn profit. Your textbook calls this the "profit motive" A famous quote by Adam Smith, the  father of economics, explains it best. "It's not from the benevolence  of the butcher, the brewer, or the baker that we expect our dinner, but it's  from their regard to their own self-interest.

" This is the miracle of markets, what's  often called "The Invisible Hand. " As individuals pursue their own self-interest, they inadvertently help society  as a whole. Think of it this way, a business can't earn profit and make themselves  better off without making the customer better off.

That, and competition between businesses, results  in higher quality products at a lower price. But there are disadvantages, for example, the free  market doesn't provide public goods and services. There's no profit in providing  a public park or free public education so the free market won't  produce those goods and services.

Also a free market might have more income equality  with a larger gap between the rich and the poor . And that's why most countries have adopted  a mixed economy where individuals own the factors of production but the government  plays a part in regulating monopolies, providing public goods and  services, and redistributing income. They want the Innovation and  growth that comes with free market capitalism and the social welfare  that comes with some central planning.

Now that's all I'm going to say about  the economic systems. If you want to learn more take a look at the video  I made with the Crash Course folks or take a look at the video where I went to  China and that lady was checking me out. "Did you notice that lady check me out" So that's it for this topic.

Again it's super  easy so fill out section 1. 2 on your study guide. In topic 1.

3 you're introduced to a  concept you're going to use for the rest of your life, the idea of opportunity cost. Because of scarcity we're forced to make choices  and every choice has a cost, an opportunity cost. It's the cost of the next best alternative.

The thing that you would have done  if you didn't make that choice. For example, the cost of going to the movies  tonight is not just the price of the ticket, it's also the time you could have spent  studying for your economics class, or the money you could have earned by  spending that time babysitting instead. So individuals businesses and  the government all make decisions by factoring in their opportunity  cost.

The thing they're giving up. And this is when you see the very  first graph you see in an econ class, the production possibilities curve. Your teacher might call it the production  possibilities "frontier" but it's the same thing.

It's a model that shows the  alternative ways we can use our scarce resources to produce only two goods. It usually starts off with a chart  like this showing the different combinations of two goods that can be  produced using all of our resources. When you plot these combinations you get  the production possibilities curve, the PPC.

Now there are three things that you're teaching or  professor is going to have you do with this graph. First, they're going to ask  questions having you explain how this graph demonstrates different  economic concepts, like efficiency. Any point inside the curve is inefficient because  we're not using our resources to the fullest.

Any point on the curve is efficient  and any point outside the curve is impossible or unattainable because  we don't have enough resources. Second your teacher will ask you to use the PPC to calculate the opportunity cost of  moving to different combinations. For example, the opportunity cost of moving from  combination B to combination C is three bikes, and the opportunity cost of moving from  combination E to combination D is two computers.

The third thing your teacher will have you do is show how changes move or shift the  PPC. For example, let's practice. Here's a PPC showing the different combinations of pizza and computers that can  be produced in your hometown.

Show what happens on this graph if  people decide to eat healthier and want less pizza. Be sure to pause this  video and see if you can figure it out. Now you might be thinking, people want less pizza so the curve is going to shift inward for  pizza.

But that's not what's going to happen. What is going to happen is this. People want less pizza so we're  going to decrease the amount of resources allocated towards pizza and  move them towards producing computers.

Think about it we don't have fewer  pizza ovens or less cooks. The amount of pizza we can produce hasn't changed  we're just changing the combination. There's one last thing that you have to know  about the PPC and it has to do with the shape.

You're likely to see two different types of PPCs. Ones that have a bowed out curve  and ones that have a straight line. A bowed out PPC shows the idea of  increasing opportunity cost.

As more of one product is produced,  the opportunity cost gets bigger. In other words, when you produce one  good you have to give up more and more of the other good because the resources to  produce both goods are not very similar. For an example, let's use corn and cars.

If we're  right here and only producing corn then all of our workers are making corn, including engineers  that are better suited towards making cars. When we produce our first few cars the  amount of corn given up is not very high because we're just moving engineers  out of the farms and into the factories. But, as you keep doing this producing more  and more cars eventually you need to start moving the farmers out of the farms and into the  factories and you're going to lose a lot of corn.

This is the law of increasing opportunity cost. Again it happens when the two  products have totally different resources and results in a bowed out PPC. A straight line PPC means the  opportunity cost is constant.

This happens when the resources that produce  to two different goods are very similar. For example, plastic forks and plastic spoons.  Producing more forks doesn't result in the loss of more and more spoons because it  require the same types of resources.

Now remember this is a summary video and  I'm going pretty quick on purpose. So, if you need more help with the PPC  take a look at my videos on YouTube. But if you can answer the questions on your  study guide then you totally understand it and you're ready to move forward.

So pause this video  and fill out that section let's see how you do. Okay by far the hardest topic in this entire unit is right here. We're talking  about comparative advantage.

"It's not that hard Scott. Tell  him. " "It's incredibly hard.

" The general idea is really simple  countries have different climates and different resources so  they can specialize in one thing and trade with other countries that  specialize in producing something else. So the concept is easy but the questions you're  going to see on your exam those are hard. Your teacher or professor is going  to give you a question like this with two countries, two products, and numbers.

In this case, the number of cars or planes  the US and Canada can make in one day. The countries, products, and numbers might change but you'll always be asked four  different types of questions: Number one, identify which country has  an absolute advantage for each good. Number two, calculate the  opportunity cost for each country.

Number three, identify which country has  a comparative advantage in which good. And, number four, identify a terms of trade  that is mutually beneficial for both countries. That's it.

If you could do these  four things then you are ready for any question your teacher or  professor is going to give you. I have a bunch of videos on  YouTube that explain these concepts and let you practice but right  now let's practice these four skills. So pause the video here's  four questions good luck.

Okay how'd you do? Did you do well?  I hope so.

Let's go over the answers. A country has an absolute advantage if  they're better at producing a product than another country. So, all you have  to do is look at the raw numbers.

The US can produce five planes and  Canada can only produce two planes so the United States has an absolute  advantage in the production of planes. And the US also has an absolute  advantage in the production of cars because they can produce more than Canada. So the answer to question one  is "No, Canada does not have an absolute advantage in cars because they  produce less than the United States.

Again it's super easy. Next, it's time to calculate opportunity  cost, which is a little harder. For calculating opportunity cost, we  know that when the US produces 5 planes they can't produce 10 cars but what's  the cost of producing only one plane?

To figure that out you need the  equation for per unit opportunity cost. It's the number of units given up,  divided by the number of units gained. So for question two if 5 planes cost the US 10 cars then the opportunity  cost of 1 plane is 2 cars.

And you can flip that to get  the opportunity cost for one car. If 10 cars cost the US 5 planes then the  opportunity cost for one car is 1/2 a plane. Again what you're calculating is  called per unit opportunity cost.

Now let's go do the same  thing for Canada. For Canada, each car costs 1/4 a plane  and each plane costs 4 cars. By the way, notice there always  a reciprocal.

If one is 4, the other one's going to be 1/4. If one  is 10 the other one is going to be 1/10th. Okay now we have enough information to answer  question three and find the comparative advantage.

Just ask yourself, "who should produce planes,  the country that gives up 2 cars or the country that gives up 4 cars? " Obviously, it's better  to give up less, so the United States has a comparative advantage in the production of planes  because they have a lower opportunity cost. And Canada has a comparative advantage in  cars.

One car cost Canada only 1/4 a plane but it cost United States 1/ 2 a plane. So,  with these numbers, Canada should specialize in producing the cars the United States  should specialize in producing planes. But we're not done.

The last step is by far  the hardest. It's finding the terms of trade. We know that each country should  specialize and produce only one thing.

But how many cars should  Canada trade for how many planes? The quick answer is that both countries  will be willing to trade if, and only if, they can get the other product at a lower  opportunity cost than if they produce themselves. For example, we know that Canada should specialize in cars and if they did make planes it  will cost them 4 cars for each plane.

But if they could trade 3 cars for one  plane they'd be better off. They could specialize in producing cars and  trade with the United States and get planes at a lower opportunity cost  than if they made planes themselves. And it's the same idea for the United  States.

We know they should specialize in planes and if they made one car  it'll cost them 1/2 a plane given up. Ao if the United States can get one  car for anything less than1/2 a plane then they're better off. With  trade they can be getting cars at a lower opportunity cost than  if they produce them themselves.

So to answer question four, trading one plane  for three cars would be mutually beneficial. It would benefit both countries because Canada can  get a plane by only giving up 3 cars instead of 4 and the United States can get a car by giving  up only 1/3 of a plane instead of giving up 1/4. Woohoo!

That was a lot. I'm telling  you this is by far the hardest topic, so here's a video of a puppy  running to help you unwind. Now hopefully you understood all  of that but we're not done.

There's actually two different types of  comparative advantage questions. The one you saw was an output question.  Now we also have to talk about input questions.

It's very likely that you'll  see both types on your next quiz or exam. Now watch carefully. I'm going  to convert this output question that I just gave you into an input  question.

So here we go, right now! Notice the countries, products, and the  numbers are the same. The only difference is what those numbers mean.

Now they represent hours. Look at the  top of the chart it says this chart shows the number of hours it takes each  country to produce one car or one plane. So in an output question those numbers  represent the number of cars and planes produced.

Now we're looking at  the hours to produce only one. So now who has an absolute advantage in the  production of cars? Well, now it's Canada because it only takes them 8 hours to produce one car  and it takes the US 10 hours to produce one car.

Now this also changes how you calculate per  unit opportunity cost. If the US takes 10 hours to produce a car and 5 hours to produce a plane  then the opportunity cost of one car is 2 planes. So when it comes to input questions, the  opportunity cost is actually the reciprocal, or it's flipped, compared to output questions.

Now after that you just do exactly what you did  before. Who should specialize in cars? Well, the United States because they only give up 2 planes and Canada gives up 4 planes. 

The US has a lower opportunity cost. And Canada should specialize in  planes because each plane costs 1/4 a car for the United States it's 1/2 a car . And, trading one car for three planes  is a mutually beneficial terms of trade.

Now, I know I went over that last part fast, but that's on purpose. Remember this is a  summary video. I have more videos on YouTube.

If you're still lost a little bit, go  back and watch my practice videos or my hacks video. They'll give you tons of tips and  strategies to make sure that you're getting it. You're going to find out right now if you  know how to do this.

Take out your study guide. I have two sets of questions for you.  The ones on the left are output questions.

The one that right those are input questions.  So right now pause this video good luck In Topic 1. 5, we dive deeper into the  skill of thinking like an economist.

So here's a question for you, "how much  does it cost to watch a YouTube video? " Before you enrolled in this class, you would  probably say there is no cost it's free. But now you know better.

The cost of watching  a YouTube video is the time you could have spent playing video games, or cleaning your  bedroom, or looking for a part-time job, or it's just a different video that  you could have been watching instead. Those are all trade-offs. The things that you  could have done.

Your opportunity cost is the one thing you would have done instead.  Again, it's the next best alternative. So watching a YouTube video isn't free. 

There's still a cost. Your opportunity cost. Economists differentiate between two types  of costs: explicit costs and implicit costs.

Explicit costs are those traditional  out-of-pocket costs associated with making a decision. It's the cost of the  movie ticket when you go to the movies. Implicit costs are those behind-the-scenes  opportunity costs when you make a decision.

It's the value of of your foregone time  or your foregone wage when you go to the movies. These costs are totally  subjective and hard to quantify, but they're just as important  when it comes to decision making. Now I talk more about cost benefit analysis  in a video on YouTube.

If you haven't seen it, take a look because I bet it  covers your opportunity cost. Now I know this is super easy we're just  introducing the concept here in Unit 1. We're going to come back to it in Unit 3 when  we calculate revenue and profit.

For now, just understanding the basics is enough.  So fill out Topic 1. 5 on your study guide.

If there's only one skill that you need to master in microeconomics it's the  idea of marginal analysis. It's making decisions by looking at the  additional benefit and the additional cost. So just remember marginal means additional.

Let me explain with a super simple  example. Let's say you're deciding on how many times you want to see the  same movie. The marginal benefit of seeing the movie the first time is $30, the  marginal benefit of the second time is $15, and the marginal benefit of the third  time is $5, so the total benefit is $50.

Assume the cost of going to the movies  is $12 so the total cost of going three times is $36. The question is how many  times should you watch the movie and why? Notice the total benefit is  greater than the total cost but you wouldn't go see the movie three times.

You would definitely go the first time because the additional benefit is $30  the additional cost is $12. You'd also go the second time because the additional benefit is $15  the additional cost is $12. But you wouldn't go the third  time because the additional benefit is only $5 and the additional cost is $12.

This is the idea of marginal analysis. When you make decisions, you don't  look at the total benefit and the total cost you look at the additional  benefit and the additional cost. Now I know you might be thinking.

"man  this is super unrealistic. No one does these calculations before they go to the movies.  True, no one really writes this out but economists argue that you do these calculations in  the back of your brain all the time.

" Even right now in the back of your brain you've  been calculating the additional benefit from an additional minute of studying economics and  weighing that against the additional cost. Now there's something else I want to  point out about our movie example. Notice the additional benefit of going  to the same movie over and over again is going down.

This is because of the  law of diminishing marginal utility. The law states that as you consume  anything, the additional satisfaction, or joy, you get from it will eventually decrease. Your marginal utility, your satisfaction, can  go up like those first few french fries you eat, but eventually the additional satisfaction  you get from each additional fry is going to fall.

You're going to get  less than less marginal utility. In the movie example, we measured  your benefit in dollars but usually we use something else it's called "Utils". Think of utils like happiness  points.

A way to quantify utility. "This is worth at least 50 utils" One of the things you're probably going to have to do on your next quiz or unit exam is  called utility maximizing and consumer choice. It involves making decisions by  calculating margin utility per dollar.

For example, suppose you're deciding to go  on vacation in Tahiti or San Diego. Going to Tahiti gives you 10,000 utils and going to San  Diego gives you 2,000 utils. Now obviously you prefer Tahiti but that doesn't mean you choose  that option.

You also have to look at the cost. If the price of going to Tahiti is $10,000  and the price of going to San Diego is $11,000 then you should actually pick San Diego  because you get more utility per dollar. So what does this look like on an  exam?

Let's do a practice question. The table below shows Ben's total utility  from consuming different amounts of french fries and shakes. The price of a bag of french  fries is $2 and the price of a shake is $3.

Fill out the blanks in the chart and answer  these questions. Pause the video. Good luck.

How did you do? Did you get it? Let's find out.

The margin utility is the change in total  utility divided by the change in quantity. Now since the change in quantity is just one  then it's just the change in the total utility. So for French fries it's 12 utils, 8 utils, 6, 4, and 2.

Notice it's falling because of  the law of diminishing margin utility. For shakes the margin utility is 24  utils, 18, 12, 9, and 6. Again this is the additional satisfaction that Ben gets from  consuming different quantities of each good.

So to answer question one, Ben's margin utility  for consuming the third Shake is 12 utils. For question two, Ben's total utility  for consuming two bags of french fries and three shakes is 74 utils. He gets a total  of 20 from the fries and 54 from the shakes.

For question three, we have to fill  out that last column and calculate margin utility per dollar. This  puts everything in like terms so we can compare apples to oranges,  or in this case fries to shakes. Fries are $2 each the marginal utility  per dollar is 6 utils, 4, 3, 2, and 1.

Shakes are $3 each the margin utility per  dollar is 8 utils, 6 utils, 4, 3, and 2. The final step is to use marginal analysis and  find out how many of each good Ben should buy. The first shake gives the most marginal utility  per dollar so he's definitely going to buy that first.

Next he's going to buy the first  bag of french fries and the second shake. Next he's going to buy the second bag  of french fries and the third shake and, since he still has money, he's going to buy the  third bag of french fries and the fourth shake. Now he spent the whole $18.

$6 on the french  fries and $12 on shakes. The point of all this is that that combination of three fries  and four shakes maximizes Ben's utility. With $18 there's no better combination  that gives you more satisfaction.

You used marginal analysis to make the best choice. To be more specific, what you used is  the utility maximizing rule. It looks like an equation but really it's a procedure.

To  maximize utility, calculate the margin utility of option A and divide that by the price.  That gives you the margin utility per dollar. And do the same thing for option B.

Calculate  the margin utility and divide that by the price. If option A gives you more margin utility  per dollar than you do it. But, eventually, that number is going to start to fall as you  do it over and over again until the margin utility per dollar for option B is greater. 

If that happens, start doing option B instead. And for these questions, keep doing that over  and over again until you run out of money. Now remember this is only the first time we're  going to use marginal analysis to make decisions.

We're going to do variations of the same  thing over and over again in future units. Whether it's a firm deciding how many units  to produce or an employer deciding how many workers to hire, we're going to be  using a lot of marginal analysis. Just remember it's all about looking at the  additional benefit and the additional cost.

Okay that's it for consumer choice and maximizing utility take out your study  guide and fill out Topic 1. 6. Okay now you're done with your study  guide so what are the next steps?

The next thing you should do is  the unit practice multiple choice questions I have in the ultimate review packet. And, when you're ready take a look at the  unit one free responses inside the ultimate review packet. Try those questions  on your own then look at the answer key and if you need more help watch the  video where I go over all the answers.

Okay that's it for microeconomics Unit 1. If this video helped you ,please give it  a like and leave a comment below. And, please consider subscribing.

Thanks  for READING. Until next time. "this is worth at least 50 utils.