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