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CHAPTER 2The Economizing Problem
Decision on factors of productionProduction Possibilities Curve
Circular Flow
What is GDP?
• Why is it important to know?
• What do we care about Per Capital Income?
• How does U.S. compare to other countries?
Thinking about different cultures
• In U.S. – emphasize our position in life.• Is this at expense of environment, education,
greater good? Where? • Majority of U.S. concern for others? Examples.• Does this mean U.S. way the only way?• Tolerance Today…. Is this viable?• Can it help our economy? How? Where?
Every Country has GDP
What parts constitute GDP. (Real or Nominal)C + I + G + X-M.
Economic Wants (anything that can be purchased in the system.)
Break Economic Wants down –• Basic• SocialBASIC: (Food, Clothing, Shelter)SOCIAL: Microwaves, Refrigerator, High Speed
Internet, Air Conditioning, Ipads,
2014 = 45Million people below poverty line. 14.5%
Food Stamps are not counted as income. If it were, the % of people counted would be lower.
Poverty for family of four is $23,550.For one person it is $11, 490
Census Bureau
Social Wants
• http://www.cnsnews.com/news/article/terence-p-jeffrey/census-americans-poverty-typically-have-cell-phones-computers-tvs
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
SO What kind of an economy are we?Tech, Agricultural, Industrial, Service?
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?
When Markets Fail
Can markets fail?Why do they fail?What generally happens when markets do fail?What is role of government?
Role of Government
Provides Legal Framework (as based on what?)Protecting the environmentProtecting the consumerProtecting labor
Any thing else?
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
Total resource = 10 hours
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
QPizzas (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
Robo
ts (t
hous
ands
)
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 Growth
The 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?
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!!!
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.
• Bottom Line
At some point societies (and individuals) have to abstain from consumption in order to have greater ability to consume in the future.. (does Congress have a social responsibility to reduce deficit?)
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.
So, is this what Greece, Spain, Portugal need to learn? What about the U.S.?
Visualizing Investment
• Often, we are hesitant to invest in capital goods “today” even if it results in larger consumer good production “tomorrow.”
• Today’s investment may• Take a long time• Have a large opportunity cost• May have uncertain results
Is there a balance? (Enter monetary and fiscal policy decisions)… high interest rates (save incentive) pulls money out of economy and places into investments – should lower inflation…
But, too much saving lowers goods available and increased demand can drive prices up, production down.
Continued OverviewGovernment steps inMarket mechanism (market prices and sales to signal
desire outputs - - or resource allocations.) (prices drive resources!!!)
Government intervention/ command economiesMarket failure (imperfection in market prevents optimal
outcomes) (housing bubble) (other’s?)Government fails- (is this possible?)
forced pollution clean-up- over taxation- federal reserve overreacts - mandates that are ineffectual or expensive- economic pie shrinks because businesses cannot adjust.
Or government spends on wrong things…doesn’t help the economic pie, just makes it fatter! Stimulus pkg, Auto bailout? Subsidies to pet political projects?
WORKING MODEL OF THE ECOMONYProduct Market
Receive Goods & Services
Payments for Goods & Services
BUSINESS HOME
Land,Labour, Capital, Entrepreneurs
Rent, Wages, Interest, Profit
Leakage
Injection
Savings Taxes
Investment
Banks
Leakage S + T = I + G Injection S+T > I+G = RecessionI+G > S+T = Inflation
Factor Market
International Participants
International Participants
Government