The economizing problem by nikeborome


									Chapter 2 - The economizing problem

Economics main problem - society’s wants are unlimited, but we only
have so much in resources (land, labor, capital, entrepreneurial ability).
Example: I don’t just want one tropical island; I want 1,000 private
islands with 3 yachts and 3 jets at each, and 10 different resorts on each
island with the biggest food buffets. And I want 30 different sports cars,
and I want, I want, I want, etc. Get the idea. The only problem is there are
only X number of islands and around 6 billion people on earth.

Difference between shortage and scarcity.
Shortage is temporary - small picture - you (meaning only 1) can
eventually get a Nintendo Wii

Scarcity is permanent - big picture - were never going to have enough

FACTORS OF PRODUCTION: The 4 main scarce resources
   Land - all natural resources: timber, oil, water, food, diamonds

   Labor - physical and mental talents of individuals (yup, it includes
    the annoying teacher and the guy working the counter at McDonalds)
 Capital - very important to understand - capital goods or investment
  goods are all manufactured aids used in producing consumer goods
  and services. The process of producing and purchasing capital goods
  is known as investment. Capital goods are different from consumer
  goods because consumer goods satisfy wants directly, while capital
  goods do so indirectly by aiding the production of consumer goods.
  Example: A consumer good is a Honda Accord. A capital good is the
  robot that helped make the Honda Accord. The tricky part is this; if a
  taxi driver uses a Honda Accord as a taxi, then the taxi is a capital
  good because it is being used as a service. Also, many people refer to
  capital as money, but in this class it’s not money. Money is just the
  means of buying the machines to produce goods and services.

 Entrepreneurial Ability - a person who: takes the initiative of
  combining resources, makes the strategic business decisions, is an
  innovator, and bears risk. Example: Bill Gates. A genius inventor
     who took a risk (put up his own time and money) by creating
     Windows and combined different capital goods (hardware and
     software) to create a new and improved capital good.

To get the most amount of stuff a society must obtain both full
employment and full production.

Full employment - everyone that is willing and able to work is working.
This does not include retired people who don’t want to work, or children
who can’t. This is an important concept that we will revisit when
discussing the labor pool. The labor pool creates
unemployment/employment percentages. Who is included in the labor
pool? People willing and able to work. People not included: full time
students, retired workers, people in jail, military personnel and people
under the age of 16. Who is considered unemployed, someone who is
actively seeking work, and is not under 16, military, full time student, in
jail, etc. In economics if we have 4%-5% unemployment we consider that
full employment (or the natural rate of unemployment) meaning pretty
much everyone that wants a job has one. There will be 4%-5% of people
unemployed but that is natural. Example: I move from FL to NC. It
might take me a week or 2 to get a job, so for those 2 weeks I am

Full production - all resources must be used so that they provide the
maximum possible satisfaction of our economic wants. If we do not
achieve full production; we have underemployment. Example: When we
have under employment that means some people might be out of work, or
some factories that could be in production aren’t. To achieve full
production you need two things, productive efficiency, and allocative
Productive efficiency - the production of any particular mix of goods and
services in the least costly way. You want to expend the least amount of
resources to produce whatever you’re making. Example: If you’re
making a 100,000,000 cars don’t mine the iron ore your self and use rocks
to flatten out the metal. Buy the metal from Japan and get machines to
press everything together.
Allocative efficiency - the least cost production of that particular mix of
goods and services most wanted by society. Example - Your company is
already making 2 products, computers and typewriters, in a productively
efficient manner. Now you have to allocate (divide up) your resources so
that society gets what it most wants. You could put 99% of your resources
into making typewriters and only 1% of your resources into making
computers, but is that smart and what society wants? No. Not many
people use typewriters any more. So, logically you should use around
97% of your resources to produce computers and around 3% for
PPC (Production Possibilities Curve) & Production Possibilities Table
- Remember everything thing else constant, don’t think outside the box -
Assumptions of the PPC graph
We can achieve full employment and productive efficiency
We have fixed resources - meaning we have a limited amount of output
We have fixed technology
We produce two types of goods or services (Example: capital goods, or
consumer goods)

Let’s have 3 students come up to the board and draw a PPC using capital
goods and consumer goods

The dot represents your production of products
A dot on the curve = full production - the curve represents the limit of
your production
A dot inside the curve = inefficient use of resources
A dot outside the curve = unobtainable with current resources

 The dot can move along the curve but in order to get more of one thing
you must give up a portion of the other good (opportunity cost). As you
move along the curve you’re allocating your resources to the production of
different goods. Example: Should you make 100 radios and 20 robots or
should you make 50 radios and 40 robots. The opportunity cost of
making 20 additional robots (total of 40 robots) is 50 radios.

There are ways to shift the entire curve outward, but to do that we must
change one of our constants (assumptions above). Things that will shift
the PPC outward are:
Increase in supplies of resources (land, labor, capital, entrepreneurial
Improvement in resource quality (smarter workers, stronger metals)
Technological advancements (from flattening metal with rocks to having
machines at Honda do it for you)
Investments in capital move the PPC outward for future years. The more
resources you put toward capital the further the PPC will shift outward. If
you place all of your resources to the production of consumer goods such
as candy bars the PPC will remain in the same place and your production
won’t increase.

The PPC is very important when it comes to international trade. We will
discuss this in great detail later but for now… The PPC in
macroeconomics show what entire countries can produce of two goods,
maybe rice and soybeans. If the U.S. is really good at the production of
soybeans (productive efficiency), and Brazil is really good at the
production of rice (productive efficiency), the U.S. should use all of its
resources to produce soybeans and trade with Brazil for rice.

On a scrap sheet of paper please answer the following questions.
1. Now even though U.S. citizens want both soybeans and rice, why
should the U.S. allocate all of its resources into the production of
soybeans? That is not demonstrating allocative efficiency.
2. What is a real world example of this type of global trade and why does
it occur?
3. What resources are being used in this real world example?
4. What kind of change regarding the PPC would cause this trading to
become obsolete? (Hint: technology)
5. Now draw your example using two PPC and fake but realistic numbers.

This shows how resources flow from households to businesses through the
resource and product markets.

Households (you) - Your resource is labor; you sell your labor in return for
money (wage, income, etc.)
Businesses - They buy your labor, and sell you (households) goods and
services (consumption)

Market system / capitalism - your living in it, kind of. In these systems
people act in their own self interest to maximize profit regarding
consumption or production of goods and services. They allow for private
ownership of capital. They communicate through prices, and coordinate
economic activities through markets (places where buyers and sellers
come together. Example: NYSE - New York Stock Exchange). Pure
capitalism has laissez faire approach, with the only government interacting
being the protection of private capital and establishing an environment
appropriate to the operation of the market system.

Command system - socialism or communism- think Cuba, or old Soviet
Union. - Very strong central government. Government makes all the
major decisions concerning the use of resources, the composition and
distribution of output, and the organization of production. A pure
command economy would use only central planning to allocate the
government owned property and resources. In reality the Soviet Union
tolerated some private ownership.

In the U.S. individuals can own the factors of production and decide how
to produce, what to produce, and how much to charge. In a communist
society these questions are answered by the government.

Sample Problem for PPC

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