Transcript CHAPTER 1 THE ECONOMY IS US!

CHAPTER 2-PPC,GAINS FROM TRADE,3
ECONOMIES, ET. AL
ECONOMIC WANTS (ANYTHING THAT CAN BE
PURCHASED IN THE SYSTEM.)
There is a difference between WANT and NEED:
Break Economic Wants down –
 Basic (bread a need is basic, shoes at Nordstrom's is
want)
 Social (pretty-much want)
BASIC: (Food, Clothing, Shelter)
SOCIAL: Microwaves, Refrigerator, High Speed
Internet, Air Conditioning, Ipads,
SOCIAL EXAMPLES U.S. HOUSEHOLDS
90% have microwave ovens
88% have television in living room
87% subscribe to cable or satellite TV
77% own personal computer
72% have flat screen TV
68% have broadband Internet service
68% have television in their bedrooms.
90% own computerized gadget
INCOME INEQUALITY
http://www.pewresearch.org/fact-tank/2014/01/07/5facts-about-economic-inequality/
FACTORS OF PRODUCTION
Land, Labor, Capital
Entrepreneurship,
Every economy works with these factors. Some have more
resources, more capital, or more land, etc. Some economies do not
encourage entrepreneurship.
SCARCITY

Scarcity

Is the most basic concept in all of economics

Occurs when the ingredients for producing things
that people desire are insufficient to satisfy all wants

Means we never have enough of everything,
including time, to satisfy our every desire
SCARCITY (CONT'D)
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What scarcity is NOT

It is not a shortage

It is not the same thing as poverty
SCARCITY (CONT'D)

Production


Any activity that results in the conversion of
resources into products that can be used in
consumption
Resources or Factors of Production

Inputs that are used to produce things that people
want
SCARCITY (CONT'D)

Resources or Factors of Production

Land


Labor

o
The human resource
Capital
o
o
Natural resources or the gifts of nature
Machinery
Entrepreneurship
ECONOMIC RESOURCES
PROPERTY RESOURCES
LAND
Land- all the bounties of nature- land, minerals,
water. What gives land value?
LABOR
Human Resources
Quality vs Quantity
Watch for capital intensive
and
Labor Intensive
Human’s ability to produce goods and services. Equal opportunity for all--everyone gets an education.
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= 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

PRODUCTIVE EFFICENCY AND FULL
EMPLOYMENT
PPC ILLUSTRATES 4 CONCEPTS
1.
2.
3.
4.
Scarcity
Choice
Opportunity Cost
Law of Increasing cost
THE WAY EACH COUNTRY ANSWERS THESE 3
QUESTIONS… INDICATES THE TYPE OF
ECONOMY THEY HAVE
PRODUCTION POSSIBILITIES CURVE
PPC
OUTPUT OF SHOES
5
A
B
4
C
3
D
2
E
1
0
1
2
3
OUTPUT OF TELEVISIONS
4
5
F
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.
FIGURE 2-1 PRODUCTION POSSIBILITIES CURVE FOR
GRADES IN MATHEMATICS AND ECONOMICS (TRADEOFFS)
INCREASING OPPORTUNITY COSTS
5
A
Step 1: give up one shoe
B
4
3
2
Step 2: get two TVs
C
Step 4: get one more TV
D
E
1
0
1
2
3
OUTPUT OF TELEVISIONS
4
5
F
PPF AND OPPORTUNITY COST
Limited Resources means
a limited output...
At any point in time,
a full-employment, fullproduction economy must
sacrifice some of product X
to obtain more of product
Y. Do you know why?
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
1
2
3
4
5
6
7
Pizzas (hundred thousands)
8
Q
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 bowed out from the origin.
Economic resources are
not completely adaptable to other uses. Crude Oil
is not adaptable to making bread.
Robots (thousands)
Q 14
Unemployment &
Underemployment
Shown by Point U
13
12
11
10
9
8
7
6
5
4
3
2
1
More of either or
both is possible
U
1
2
3
4
5
6
7
Pizzas (hundred thousands)
8
Q
ECONOMIC GROWTH
The ability to produce
a larger total output - OR
a rightward shift of
the production
possibilities curve caused by...
????????
ECONOMIC GROWTH AND THE
PRODUCTION POSSIBILITIES CURVE

Economic growth

Increases the production possibilities of smart phones
and tablet devices

Over time, it is possible to have more of everything

Illustrated by an outward shift of the production
possibilities curve
FIGURE 2-4: ECONOMIC GROWTH ALLOWS
FOR MORE OF EVERYTHING
SHIFT IN THE PPF
RESEARCH AND DEVELOPMENT
R&D
1 – Increase in resource supplies
2 - New Resources
3 – Better resource quality
4 – Technological
advances
TIME TO THINK… PUT YOUR “THINKING
HAT ON.”
If we do not utilize our resources…what happens?
unemployment
lower standard of living
Where would we be on our PPC?
*******Mental exercise….capital goods vs
consumer goods. – check out the ingredients
CONSUMPTION GOODS AND CAPITAL
GOODS: A TRADE-OFF

Consumer goods


Goods produced for personal satisfaction
Capital goods

Goods used to produce other goods
THINK ON THESE THINGS FOR GROWTH
Two things to do with your money?
 When you save it where do you put it?
 What does that financial intermediary do with it?
 Why?
 What is capital?
 What does that injection of cash often provide?
 Is consumption important to an economy? Why
 Is capital important to an economy? Why
Savings
Investment
Jobs
Growth

TIME TO PONDER!!!
THE TRADE-OFF BETWEEN THE PRESENT
AND THE FUTURE (CONT’D)

Observations

An increase in capital goods at present will lead to a
higher rate of economic growth in the future

In the future, the economic system can produce more
consumer goods
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
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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 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.
TRADE INSIGHTS
Trade=exchanging one thing for another.
Usually goods or services for $$.
The economics profession nearly unanimously
backs free trade.
FREE TRADE? GOOD OR DETRIMENTAL?
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?
4)What incentive do businesses need to
bring their jobs back to U.S.
5) How do you feel about businesses being
subsidized by government?
“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.
CAN US WORKFORCE FIND JOBS?

http://www.econedlink.org/interactives/index.php
?iid=172&type=educator
DICK AND JANE CAN BOTH BUILD BOAT
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.
COMPARATIVE ADVANTAGE
“The ability of a country to produce a specific
good at a lower opportunity cost than its
trading partners.”
David Ricardo, English Economists in 1800s developed this
theory.
Example:
I can design a web page in 2 hours and wash
a car in 3 hours.
Sam can design a web page in 6 hours and
wash a car in 2 hours.
Should I do both?
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
Elizabeth Opportunity Cost 1B=1A, 1A=1B
Brian 1B = 3A, 3A =l/3B
TERMS OF THE TRADE
Elizabeth and Brian Before the Trade
Terms of Trade: Elizabeth and Brian decide to trade 8 loaves of bread for
12 apples.
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.
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.
ABSOLUTE ADVANTAGE
Elizabeth can bake bread better and faster and can
produce apples better and faster.
Brian is left out in the cold!
PROGRESS= DIVISION OF LABOR AND
SPECIALIZATION.
Production Increases
 Division and Specialization of Labor
example:
task become repetitious
task is continuous (no switching from
one task to another)
better ways to produce (innovation)
workers find easier ways to
perform task.
 Exchange takes place.
Thank you Mr. Smith!

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.
3 COMMON GAINS FOR SOCIETY
1.
2.
3.
New Technology
New Resources
Specialization and Trade
WHAT ABOUT INTERNATIONAL TRADE?

Outsourcing?
Examples being sent over today:
customer service, telemarketing, document
management, law research, basic labor tasks

Insourcing?
www.dice.com
QUESTION FOR THE DAY?
What kind of an
economy
does the U.S.
have?
What are the 3
basic economies
of the world?
WHAT KIND OF AN ECONOMY IS IT?
Capitalism
Socialism
Communism
WHAT IS AN ECONOMIC SYSTEM?
Economic system is more than simply a way to make a
decision
 It is a way of life.
 Differs among societies and reflects a wide variety of
values for individuals.
 One value cannot prove superior to others as a general
rule. Values are set in cultures and cultures set by
economic system.

WHAT IS CAPITALISM?



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Accumulation of factors of production
Productive labor (work for wages/become
productive/produce more/ more accumulation of
financial capital and capital)
Profits are the motivational factor to production and
wages.
Private Property is paramount.
Does it discourage wealth?
Is wealth considered greedy?
Why is capitalism so revered as opposed to other
systems?
Key to capitalism is what?
WHAT IS SOCIALISM?
Degrees of socialism – all of Europe is example
 Major factors of production owned by
government.
 It has degrees between market and marxism
 Generally means that factors are owned in
common and/or regulated by government
 Redistribution of wealth is key
 Private ownership can and does exist.
 Profit is not an objective, but distributing goods
and services to all equally is. Equality of
distribution- *** remember utopias and the
hippies.

FREEDOMS MEASURED BY ECONOMIES
CAPITALISM
Most
Reduced
SOCIALISM
Quasi-Balanced
COMMUNISM
Increased
Freedom measured by degrees
Least
DEGREES OF SOCIALISM-JUST LIKE
DEGREES OF CAPITALISM.
MARXISM – MAO TOTALITARIANISM

Dictatorship would rule working class-become central
planners- making all economic decisions.

Through socialism people’s material and spiritual well-being
would improve. A true classless society would come into
existence.

All property would be owned collectively

All people would work to the best of their abilities to produce
goods and services.

People would consume only what they need

People would worship the government.
SUMMARY COMMAND
 Relatively
small amount of personal freedomvery restricted.
 Lower standard of living for all except political
leaders.
 Only one political party runs government
 Production and distribution of goods in hands
of government
 Change through revolution (often bloodyRussia, China)
 Private business can exist- state controlled
 Master plan of government is key to economic
success.If plan fails, economy fails.
REMINDER
There are no pure economic systems anyplace in
the world.
Because we began civilization as clans, tribes,
etc…. Traditional was prevelent
Moved to Kings, Sovereigns, benevelent and nonbenevelent rulers (but…. Combined the political
with the economic)
Europe had strong mercantilist economy for over
300 years.
So how unusual it was for a new nation to actually
want to self-rule and establish a market economy.
HOW ON EARTH COULD THE CANDLES BE MADE,
THE BREAD BAKED, THE BUSINESSES
ESTABLISHED????
Invisible Hand concept – Mr. Adam Smith.
I know of no safe depository of the ultimate
powers of society but the people themselves, and
if we think them not enlightened enough to
exercise their control with a wholesome
discretion, the remedy is not to take it from
them but to inform their discretion by
education.
Thomas Jefferson
TWO INSEPARABLE
CONCEPTS
TRADE AND GROWTH ARE GOOD!