Transcript CHAPTER 1 THE ECONOMY IS US!

CHAPTER 2
THE ECONOMIZING PROBLEM
Why are you taking this economics class?
What would you rather be doing?
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.
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.
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
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 CONCAVE - 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...
????????
PPF AND ECONOMIC GROWTH
RESEARCH AND DEVELOPMENT
R&D
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? More from private or
public?
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.
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!!!
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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.
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 country
2) 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 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 1B=1A, 1A=1B
Brian 1B = 3A, 3A =l/3B
TERMS OF THE TRADE
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.
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!
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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.
WHAT ABOUT INTERNATIONAL TRADE?

Outsourcing?
Examples being sent over today:
customer service, telemarketing, document
management, law research, basic labor tasks

Insourcing?
www.dice.com
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.
DEGREES OF SOCIALISM-JUST LIKE
DEGREES OF CAPITALISM.
FREEDOMS MEASURED BY ECONOMIES
CAPITALISM
Most
Reduced
SOCIALISM
Quasi-Balanced
COMMUNISM
Increased
Freedom measured by degrees
Least
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.
TAKE A LOOK AT A TYPICAL GROCERY
STORE
U/S
Cuba
WHAT IS MARKET FAILURE?
When the market produces more or less than the
ideal optimal good or service. OR the wrong mix
of input is given for output…..
 Brings about externalities and public goods.

WHEN THE MARKET FAILS… IT IS A
DOUBLE EDGE SWORD
Market Fails if not optimal mix.
* Optimal Mix of Output……
“Most desirable combination of output
attainable with existing resources,
technology and social values.”
Market Failure
*“An imperfection in the market
mechanism that prevents optimal
outcomes.”
IN REAL WORDS?
Not enough public parks…
Not enough care for environment…
Not enough welfare…
Too much separation between top 10% income
earners and median income earners…
Not adequate security within our borders….
Too many immigrants….
THREE AREAS OF CONCENTRATION
1.
Explain how market failures, such as externalities, might justify economic
functions of government
2. Distinguish between private and public goods and explain the nature of the
free-rider problem
3. Describe the political functions of government that entail its involvement in the
economy
TRADE AND GROWTH ARE GOOD!