CHAPTER 2 The Economizing Problem

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CHAPTER 2The Economizing Problem

• Why are you taking this economics class?
• What would you rather be doing?

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Economic Models

• Economic Models (why?)Simplified representation
• Economic model gives incites as to how something
  works only a model cannot be totally accurate.
• Production Possibility Curve model
• Assumptions
• maximum amount of any two goods that can be
  produced from a fixed amount of resources.
• specific time period
• fixed resources and fixed technology PRODUCTIV
  E EFFICENCY AND FULL EMPLOYMENT

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PPC illustrates 4 concepts

• Scarcity
• Choice
• Opportunity Cost
• Law of Increasing cost
• THE WAY EACH COUNTRY ANSWERS THESE 3 QUESTIONS
  INDICATES THE TYPE OF ECONOMY THEY HAVE

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Production Possibilities CurvePPC
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Note Difference in Shape of Curve
Economics
English
Direct Correlation Two items produced 1 to 1
ratio. Can Relinquish one part of resources and
not have to give up More of another. No law of
increasing cost.
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Increasing Opportunity Costs
A
Step 1 give up one shoe
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B
4
Step 2 get two TVs
C
3
Step 4 get one more TV
D
2
E
1
F
0
1
2
3
4
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OUTPUT OF TELEVISIONS
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Limited Resources means a limited output...
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?
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Production Possibility
Q
14 13 12 11 10 9 8 7 6 5 4 3 2 1
Unattainable
A
B
C
W
D
Attainable but Inefficient
E
Q
1 2 3 4 5 6
7 8
Pizzas (hundred thousands)
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Law of Increasing Opportunity Costs

• The amount of other
• products that must be
• forgone 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 are
• not completely adapt-
• able to other uses. Crude Oil is not adaptable
  to making bread.

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Unemployment Underemployment Shown by Point U
More of either or both is possible
U
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Economic Growth
The ability to produce a larger total output -
OR a rightward shift of the production
possibilities curve caused by... ????????
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PPF and Economic Growth
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Research and Development RD

• 1 Increase in resource supplies
• 2 - New Resources
• 3 Better resource quality
• 4 Technological
• advances
• Where does the impetus of this R D come from?
• Private or public sector?

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Time to Think put your thinking hat on.

• If we do not utilize our resourceswhat happens?
• unemployment
• lower standard of living
• Where would we be on our PPC?
• Mental exercise.capital goods vs consumer
  goods.

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• 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.
• Is there a balance? (Enter monetary and fiscal
  policy decisions) high interest (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.

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Continued Overview

• Government steps in
• Market mechanism (market prices and sales to
  signal desire outputs - - or resource
  allocations.)
• Government intervention/ command economies
• Market failure (imperfection in market prevents
  optimal outcomes)
• Government fails- (is this possible?)
• forced pollution clean-up- over taxation-
  mandates that are ineffectual or expensive-
  economic pie shrinks because businesses cannot
  adjust.Or government spends on wrong
  thingsdoesnt help the economic pie, just makes
  it fatter! Stimulus pkg, Auto bailout?

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Factors of Production

• Land
• Labor
• Capital
• Entrepreneurship

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ECONOMIC RESOURCES
PROPERTY RESOURCES
LAND
Land- all the bounties of nature- land,
minerals, water. What gives land value?
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Labor
Human Resources Quality vs Quantity Watch for
capital intensive and Labor
Intensive
Humans ability to produce goods and services.
Equal opportunity for all--- everyone gets an
education.
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Capital
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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)

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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.

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Thinking Hat Time

• Name some Entrepreneurs today?

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Mrs. Karen Horn
WORKING MODEL OF THE ECOMONY
Payments for Goods Services
Product Market
Receive Goods Services
Injection
Investment
Spending
Banks
Govt
BUSINESS
HOME
Savings
Taxes
Leakage
Factor Market
Land,Labour, Capital, Entrepreneurs
Rent, Wages, Interest, Profit
ST gt IG Recession IG gt ST Inflation
Leakage S T I G Injection
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Trade Insights

• 
  
• Tradeexchanging one thing for another. Usually
  goods or services for .
• The economics profession nearly unanimously backs
  free trade.

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

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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.

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Dick and Jane can both build boats

• Both can build boats/cars
• Dick can build more cars in less time than Jane
• Jane can build more boats than Dick
• Dick builds cars- Jane builds boats They trade
  freely and both are better off.
• Process which has lowest opportunity cost each
  gains more than initial individual effort.

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Deciding lower opportunity cost
Elizabeth and Brian Before the Trade
Elizabeth and Brian both like bread and
apples And live close to each other (given)
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 thing Look for lowest
opportunity cost But Elizabeth Opportunity Cost
1B1A, 1A1B Brian 1B 3A, 3A l/3B
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Elizabeth and Brian Before the Trade
Now Elizabeth and Brian decide to trade 8 loaves
of bread for 12 apples. Terms of Trade
Elizabeth bakes bread trades 8 to Brian. Brian
produces apples and trades 12 to Elizabeth
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.
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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 apples Clearly both are better off See
first column above! Trade works. But free trade
works great.
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Absolute Advantage

• Elizabeth can bake bread better and faster and
  can produce apples better and faster.
• Brian is left out in the cold!

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The invisible hand permeates throughout our
economy.Even when we arent 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.
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Trade and Growth are Good!