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CHAPTER 2 The Economizing Problem

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CHAPTER 2 THE ECONOMIZING PROBLEM Why are you taking this economics class? What would you rather be doing? – PowerPoint PPT presentation

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Title: CHAPTER 2 The Economizing Problem


1
CHAPTER 2 The Economizing Problem
  • Why are you taking this economics class?
  • What would you rather be doing?

2
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.
3
ECONOMIC RESOURCES
PROPERTY RESOURCES
LAND
Land- all the bounties of nature- land,
minerals, water. What gives land value?
4
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.
5
Capital
6
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)

7
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.

8
Thinking Hat Time
  • Name some Entrepreneurs today?

9
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 PRODUCTIV
    E EFFICENCY AND FULL EMPLOYMENT

10
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

11
Production Possibilities Curve PPC
12
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.
13
Increasing Opportunity Costs
A
Step 1 give up one shoe
5
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
5
OUTPUT OF TELEVISIONS
14
(No Transcript)
15
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?
16
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)
17
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.

18
Unemployment Underemployment Shown by Point U
More of either or both is possible
U
19
Economic Growth
The ability to produce a larger total output -
OR a rightward shift of the production
possibilities curve caused by... ????????
20
PPF and Economic Growth
21
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?
    More from private or public?

22
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.

23
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!!!

24
  • 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.

25
Trade Insights

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

26
  • 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?

27
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.

28
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.

29
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
30
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.
31
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.
32
Absolute Advantage
  • Elizabeth can bake bread better and faster and
    can produce apples better and faster.
  • Brian is left out in the cold!

33
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!

34
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.
35
What about International Trade?
  • Outsourcing?
  • Examples being sent over today customer service,
    telemarketing, document management, law research,
    basic labor tasks
  • Insourcing?
  • www.dice.com

36
What kind of an economy is it?
  • Capitalism
  • Socialism Communism

37
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.

38
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.

39
Degrees of Socialism-Just like degrees of
Capitalism.
40
Freedoms measured by economies
  • CAPITALISM SOCIALISM

COMMUNISM
Most Reduced
Quasi-Balanced Increased Least
Freedom measured by degrees
41
MARXISM
  • Dictatorship would rule working class-become
    central planners- making all economic decisions.
  • Through socialism peoples 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.

42
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.

43
Take a look at a typical grocery store
U/S
Cuba
44
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.

45
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.

46
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.

47
Three areas of concentration
  • 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

48
Trade and Growth are Good!
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