CHAPTER 2THE ECONOMIZING PROBLEM

Why are you taking this economics class?

What would you rather be doing?

FACTORS OF PRODUCTION

Every economy works with these factors. Some have moreresources, more capital, or more land, etc. Some economies do notencourage entrepreneurship.

LAND

LABOR

CAPITAL

ENTREPRENEURSHIP

PROPERTY RESOURCES

LAND

ECONOMIC RESOURCES

Land- all the bounties of nature- land, minerals, water. What gives land value?

LABOR

Human ResourcesQuality vs Quantity

Watch for capital intensive andLabor Intensive

Human’s ability to produce goods and services. Equal opportunity for all---

everyone gets an education.

CAPITAL

IN THE FACTORS OF PRODUCTION CAPITAL IS MACHINERY, TOOLS USED TO MAKE OTHER TOOLS, BUT THERE ARE OTHER TYPES OF CAPITAL

**************physical (good used to produce another good… machinery- tools to produce tractors, computers, roofing machines….*this is why U.S. has a high standard of living (technology, industrial development). Level of consumption depends on R & D to come up with new resources when ones used are getting near depletion.financial- money as such produces nothing. Money only considered as medium of exchange.. Has to be put to use in investment to see growth.human- our mind….can put under physical also because this is a tool…. (for some people)

WHAT IS AN ENTREPRENEUR?

French term “one who begins.”Person who takes the 3 factors.. Puts them

together…. (success and failure)Example- Robert Fulton/steamboat… went bankrupt

3 times before he convinced people that a boat could be powered by steam.

THINKING HAT TIME

Name some Entrepreneurs today?

ECONOMIC MODELS

Economic model gives incites as to how something works… only a model… cannot be totally accurate.

Production Possibility Curve= modelAssumptions: maximum amount of any two goods that

can be produced from a fixed amount of resources.

specific time period fixed resources and fixed technology

PRODUCTIVE EFFICENCY AND FULL EMPLOYMENT

PPC ILLUSTRATES 4 CONCEPTS

1. Scarcity2. Choice3. Opportunity Cost4. Law of Increasing cost

THE WAY EACH COUNTRY ANSWERS THESE 3 QUESTIONS… INDICATES THE TYPE OF ECONOMY THEY HAVE

PRODUCTION POSSIBILITIES CURVEPPC

A

B

C

D

E

F

OUT

PUT

OF

SHO

ES

5

4

3

2

1

0 1 2 3 4 5OUTPUT OF TELEVISIONS

NOTE DIFFERENCE IN SHAPE OF CURVE

Direct Correlation … Two items produced… 1 to 1 ratio. Can Relinquish one part of resources and not have to give upMore of another. No law of increasing cost.

Economics

English

INCREASING OPPORTUNITY COSTS

Step 1: give up one shoe

Step 2: get two TVs

Step 4: get one more TV

A

B

C

D

E

F

5

4

3

2

1

0 1 2 3 4 5OUTPUT OF TELEVISIONS

At any point in time, a full-employment, full-production economy must sacrifice some of product X to obtain more of product Y. Do you know why?

Limited Resources meansa limited output...

PRODUCTION POSSIBILITY

Q

QQPizzas (hundred thousands)

1413121110 9 8 7 6 5 4 3 2 1

1 2 3 4 5 6 7 8

A B

C

D

E

W

Attainablebut

Inefficient

Unattainable

LAW OF INCREASING OPPORTUNITY COSTSThe amount of other products that must beforgone or sacrificed to obtain 1 unit of a

specific product is called the opportunity cost of that good.

A graph of the production possibilities curve will be CONCAVE - bowed out from the origin.

Economic resources arenot completely adapt-able to other uses. Crude Oil is not adaptable

to making bread.

Q

Q

Ro

bo

ts (t

ho

usa

nd

s)

Pizzas (hundred thousands)

1413121110 9 8 7 6 5 4 3 2 1

1 2 3 4 5 6 7 8

U

Unemployment &Underemployment Shown by Point U

More of either orboth is possible

ECONOMIC GROWTHThe ability to produce

a larger total output - OR

a rightward shift of

the production

possibilities curve caused by... ????????

PPF AND ECONOMIC GROWTH

RESEARCH AND DEVELOPMENT R&D

1 – Increase in resource supplies2 - New Resources 3 – Better resource quality 4 – Technological

advances

Where does the impetus of this R & D come from? More from private or public?

TIME TO THINK… PUT YOUR “THINKING HAT ON.”

If we do not utilize our resources…what happens?

unemploymentlower standard of living

Where would we be on our PPC?*******Mental exercise….capital goods vs

consumer goods.

BUILDING A CONCEPT

What two things can you do with your money?

If you put into savings, what happens then? Can this money be loaned out to businesses? What will businesses do hopefully? What is capital? How can capital be created? Is consumption important in an economy? Is capital important in an economy? OK… Time to ponder!!!

Bottom Line At some point societies (and individuals) have to

abstain from consumption in order to have greater ability to consume in the future..

We (consumers) determine what goes into consumption/savings…

Resources are limited…. Need to save so that capital can be acquired… (industrial development) But… need to consume also. Especially now.

TRADE INSIGHTS

Trade=exchanging one thing for another. Usually goods or services for $$.

The economics profession nearly unanimously backs free trade.

So………….If economists agree that Free Trade is a good thing….. Why all the fuss politically and internally about 1) jobs fleeing the country2) unfair advantages for subsidies/3) what is in-sourcing?

“NO NATION WAS EVERY RUINED BY TRADE.”

BENJAMIN FRANKLIN

Terms of Trade = how much of one thing for how much of something else.

Transaction costs = costs of time/effort to negotiate or work out deals.

Absolute Advantage = Comparison of production costs of two countries.

Comparative Advantage = Output is greatest when each product is made by the country with the lowest opportunity cost.

What is Exchange? = giving up one thing for another.

DECIDING LOWER OPPORTUNITY COST

Elizabeth and Brian Before the Trade

Elizabeth production possibilities… best for her 10 bread and 10 apples Brian production possibilities… best for him 5 bread 15 applies.Comparative Advantage says – 2 parties, both produce same thingLook for lowest opportunity costBut Elizabeth Opportunity Cost 1B=1A, 1A=1BBrian 1B = 3A, 3A =l/3B

Elizabeth and Brian both like bread and applesAnd live close to each other (given)

TERMS OF THE TRADEElizabeth and Brian Before the Trade

Elizabeth decides to produce 20 loaves bread – trades 8 to Brian and receives 12 apples.Brian produces 30 apples – trades 12 apples to Elizabeth and receives 8 loaves bread.

Now Elizabeth and Brian decide to trade 8 loaves of bread for12 apples. = Terms of Trade Elizabeth bakes bread trades 8 toBrian. Brian produces apples and trades 12 to Elizabeth

COMPARATIVE ADVANTAGE BONUS

Remember terms of trade 8 loaves for 12 apples….Elizabeth now consumes 12 loaves bread and 12 apples

Brian consumes 8 loves of bread and 18 applesClearly both are better off… See first column above!Trade works…. But free trade works great.

ABSOLUTE ADVANTAGE

Elizabeth can bake bread better and faster and can produce apples better and faster.

Brian is left out in the cold!

THE INVISIBLE HAND PERMEATES THROUGHOUT OUR ECONOMY.EVEN WHEN WE AREN’T LOOKING!

We serve our self interest- invisible hand guides us toward certain actions that will make us better-off. Adam Smith concept…. If we all attempt to improve our situation, society profits. Elizabeth and Brian served their self interest by producing and trading.

TRADE AND GROWTH ARE GOOD!