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
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= 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
A
Unattainable
B
C
W
D
Attainable
but
Inefficient
E
1
2
3
4
5
6
7
8
Pizzas (hundred thousands)
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
8
Pizzas (hundred thousands)
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?
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?
unemployment
lower 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..
 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.?
Is there a balance? (Enter monetary and
fiscal policy decisions)… high interest
(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 Overview
Government steps in
Market mechanism (market prices and sales to signal
desire outputs - - or resource allocations.)
Government intervention/ command economies
Market failure (imperfection in market prevents
optimal outcomes)
Government fails- (is this possible?)
forced pollution clean-up- over taxation- 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?