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!