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 ovens88% have television in living room87% subscribe to cable or satellite TV77% own personal computer72% have flat screen TV68% have broadband Internet service68% have television in their bedrooms.90% own computerized gadget
FACTORS OF PRODUCTION
Land, Labor, Capital Entrepreneurship,
Every economy works with these factors. Some have moreresources, more capital, or more land, etc. Some economies do notencourage entrepreneurship.
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?
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
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
PPF AND OPPORTUNITY COST
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
QQPizzas (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 bowed out from the origin.
Economic resources arenot completely adaptable to other uses.
Crude Oil is not adaptable to making bread.
Q
Q
Ro
bo
ts (t
ho
usa
nd
s)
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 GROWTHThe ability to produce
a larger total output - OR
a rightward shift of
the production
possibilities curve caused by... ????????
SHIFT IN THE PPF
RESEARCH AND DEVELOPMENT R&D
1 – Increase in resource supplies2 - 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?
unemploymentlower standard of living
Where would we be on our PPC?*******Mental exercise….capital goods vs
consumer goods.
BUILD A CONCEPT 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? WhySavings Investment Jobs
Growth
TIME TO PONDER!!!
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
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 country2) 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/carsDick can build more cars in
less time than JaneJane can build more boats
than DickDick 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.
DECIDING LOWER OPPORTUNITY COST
Elizabeth and Brian Before the Trade
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 thingLook for lowest opportunity costElizabeth Opportunity Cost 1B=1A, 1A=1BBrian 1B = 3A, 3A =l/3B
Elizabeth and Brian both like bread and applesAnd live close to each other (given)
TERMS OF THE TRADEElizabeth and Brian Before the Trade
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.
Terms of Trade: Elizabeth and Brian decide to trade 8 loaves of bread for12 apples. Elizabeth bakes bread trades 8 to Brian Brian produces apples and trades 12 to Elizabeth
COMPARATIVE ADVANTAGE BONUS
Remember terms of trade 8 loaves for 12 apples….
Elizabeth now consumes 12 loaves bread and 12 applesBrian consumes 8 loves of bread and 18 applesClearly 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 repetitioustask 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. New Technology2. New Resources3. 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 economydoes 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? 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 ECONOMIESCAPITALISM SOCIALISM
Most Reduced Quasi-Balanced Increased Least
COMMUNISM
Freedom measured by degrees
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 freedom-very 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 bloody-
Russia, 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 non-benevelent 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!