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An Exercise in Connecting the Dots
Today, over 1 billion people in the world gohungry while over 1 billion people areoverweight.
How do you explain this?
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Connecting more dots
• How do you explain therelationship between the previousproblem and the 3 features of the
economic way of thinking:
Scarcity and ChoiceRational behaviorMarginal analysis
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TheEconomizing
Problempart 1
!earning "b#ectives$%tudents will thoroughly and co&pletely explain$
The ' basic input (actors o( production,The individual)s econo&i*ing proble&,%ociety)s econo&i*ing proble&.The basic types o( econo&ic syste&s,The circular (low &odel.
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The +oundations o( Econo&ics
SOCIETY HAS VIRTUALLY UNLIMITED WANTS...
The econo&ic wants o(
citi*ens,(ir&s, and govern&ents
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BUT LIMITED OR SCARCE PRODUCTIVE RESOURCES!
SOCIETY HAS VIRTUALLY UNLIMITED WANTS...
The +oundations o( Econo&ics
The &eans o( producinggoods and services
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oods - %ervices rovide...
UTILITY A &easure o( satis(action or pleasure.
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Individuals want luxuries – goods and services
oods - %ervices rovide/
UTILITY
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oods - %ervices rovide...
UTILITY
As well as necessities
The ob#ective o( all econo&ic activity
0s to (ul(ill wants.
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• PROPERTY RESOURCES
LAND - including ecosystem services
%carce esourcesTypes of Economic esources
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Property Resources
- LAND
- !A"ITAL
%carce esourcesEconomic esources
eal Capital$E2uip&ent, tools,
&achinery, buildings 34sed to produce (inalgoods5+inancial Capital $ +undsavailable (or ac2uiringreal capital5
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Property Resources
LAND
!A"ITAL
HUMAN RESOURCES
%carce esourcesEconomic esources
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PROPERTY RESOURCES
LAND
!A"ITALHUMAN RESOURCES
- LA#$ – p%ysical &'ental talents of individuals(
Availa)le and usea)le in t%e
production of goods and services
%CA CE E%"4 CE%E!$N$'I! E*$+ !E*
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ntrepreneurial !bility
• "he ntrepreneur: – "akes the #nitiative in combining resources – Makes Strategic $usiness %ecisions that set
the course of the business – #s an #nnovator – "he Risk $earer & success is not guaranteed
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PROPERTY RESOURCES
LAND
!A"ITAL
HUMAN RESOURCESLA#$
ENT E" ENE+ IAL A#ILIT,
%CA CE E%"4 CE%E!$N$'I! E*$+ !E*
Also knownas the
I put
"ctors o# Pro$uct%o
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esource ay&ents
RENTALINCOME
INTEREST INCOME
WAGESPROFIT &
LOSS
PROPERTY RESOURCESLAND
CAPITAL
HUMAN RESOURCES
LABOR
ENTREPRENEUR
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"he #ndividual's conomi(ing)roblem
Characteristics:• *imited income• +nlimited wants• ! budget line & aka budget constraint• "radeo,s - opportunity costs• Make best choice possible• .hat happens when there is a change in
income/
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$udget *ine 0constraint1 for the#ndividual
6
7'8
91:
:
9'6
;1:19
Doo s=1:
19
1:
;
6
'
9
:9 ' 6 ; 1: 19 1'
=19: >udget
0nco&e @ =19:
P dvd
@ =9:@ 6
0nco&e @ =19:
P b @ =1:@ 19
Attainable
4nattainable
uantity o( aperbac >oo s
A u a n
t i t y o
( D < D s
131B
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Society's conomi(ing)roblem
Introducing the ProductionPossibility Model.
• ! )roduction )ossibilities Model illustratesthe tradeo,s and output that are possiblegiven a limited amount of input2
• #t is important to understand because itcan help display which options mightallow a countr to use their resources in
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ey oint$a e sure you understand this$
To realize the best use of scarce resources,
A society must achieve both
full employment and full production!
What does this mean?
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ey oncep s o emodel• 5ull mployment & the use of all
available resources• 5ull production & all employed
resources are used so they provide the
maximum satisfaction of our economicwants2
• This implies two kinds of
e ciency.• )roductive ciency & )roduction of
any particular mix of goods and
services in the least cost way2
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The roduction ossibilities &odel
!ssumptions
1. +ull E&ploy&ent and +ull roduction
9. +ixed resources in both 2uantity and 2uality
8. +ixed technology
'. Two oods a consu&er good and a capital good
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roduction ossibilities
!ssumes222+ull E&ploy&entand roductiveE((iciency
+ixed esources+ixed TechnologyTwo oods
for example222
. 0 F F A
A Consumer Good
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Two oods
+ixed esources+ixed Technology
!ssumes222+ull E&ploy&entand roductiveE((iciency
roduction ossibilities
for example222
1 o b o t s
A Capital Good
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Us% & "'' o# our resources( to&et so)e )ore p%**"( +e )ust &%,eup so)e )ore ro-ots!
for example
Ghat i( we could only produce ...
.(... o)otsor
/..(... "i00as
roduction ossibilities
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"I11A . 2 3 /% /u $re$ t/ous" $s0
$#$T* .4 5 / .% t/ous" $s0
in table form
roduction ossibilities
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"I11A . 2 3 /% /u $re$ t/ous" $s0
$#$T* .4 5 / .% t/ous" $s0
in table form
graphical form
o ) o
t s
6 t % o u s a n
d s
7
"i00as 6%undred t%ousands7
roduction ossibilities
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"I11A . 2 3 /% /u $re$ t/ous" $s0
$#$T* .4 5 / .% t/ous" $s0
in table form
graphical form
o ) o
t s
6 t % o u s a n
d s
7
"i00as 6%undred t%ousands7
roduction ossibilities
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"I11A . 2 3 /% /u $re$ t/ous" $s0
$#$T* .4 5 / .% t/ous" $s0
in table form
graphical form
o ) o
t s
6 t % o u s a n
d s
7
"i00as 6%undred t%ousands7
roduction ossibilities
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"I11A . 2 3 /% /u $re$ t/ous" $s0
$#$T* .4 5 / .% t/ous" $s0
in table form
graphical form
o ) o
t s
6 t % o u s a n
d s
7
"i00as 6%undred t%ousands7
roduction ossibilities
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"I11A . 2 3 /% /u $re$ t/ous" $s0
$#$T* .4 5 / .% t/ous" $s0
in table form
graphical form
o ) o
t s
6 t % o u s a n
d s
7
"i00as 6%undred t%ousands7
roduction ossibilities
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At " y po% t % t%)e( " #u''1e)p'oy)e t( #u''1 pro$uct%o eco o)y )ust s"cr%#%ce so)e o# pro$uct 2 to o-t"% )ore o# pro$uct Y .
mited Resources meanlimited output222
roduction ossibilities
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8
8
o ) o
t s 6 t % o u s a n
d s
7
"i00as 6%undred t%ousands7
/32
. 4 9 5 : ; / 3 2
2 3 / ; : 5 9
A #
!
D
E
<
Att"% "-'e
-ut I e##%c%e t
U "tt"% "-'e
Att"% "-'e3 E##%c%e t
Note4 E,ery po% t o t/e cur,ereprese ts pro$uct%,ee##%c%e cy
roduction ossibilities
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T/e ")ou t o# ot/er pro$ucts t/"t )ust -e#or&o e or s"cr%#%ce$ to o-t"% 5 u %t o# "
spec%#%c pro$uct %s c"''e$ t/e opportu %tycost o# t/"t &oo$.
T/e L"+ o# I cre"s% & Opportu %ty Costss"ys4 t/"t % or$er to pro$uce )ore o# o e&oo$( )ore o# so)e ot/er &oo$ )ust -es"cr%#%ce$.
L"+ o# I cre"s% & Opportu %ty Costs
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8
8
o ) o
t s 6 t % o u s a n
d s
7
"i00as 6%undred t%ousands7
/32
. 4 9 5 : ; / 3 2
2 3 / ; : 5 9
A #
!
D
E
Att"% "-'e
-ut I e##%c%e t
E6p'"% t/e L"+ o# I cre"s% &Opportu %ty Costs us% & t/ePPC.
roduction ossibilities
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To (ind the point o( allocative e((iciency,you can use arginal analysis, which involves$
Co&paring &arginal bene(its and &arginal costsHere's how to think about marginal analysis:62 !ny economic activity should be expanded
as long as Marginal bene7ts exceed Marginalcosts2
82 "he optimal amount of activity occurs atM$9MC
32 o resources beyond the M$9MC pointshould be allocated to the production of thatgood2 #n fact; you should reduce the use of
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8
8
o ) o
t s 6 t % o u s a n
d s
7
"i00as 6%undred t%ousands7
/32
. 4 9 5 : ; / 3 2
2 3 / ; : 5 9
A #
!
D
E
Att"% "-'e
-ut I e##%c%e t
W/ere o t/e cur,e +%'' t/ePo% t o# A''oc"t%,e E##%c%e cy -e#ou $7
roduction ossibilities
Here)s How to +igure it out5
Two %tep rocess$1. +ind the allocatively e((icient2uantity o( i**as.
9. Then (ind the 2uantity o( obotsthat correspond to that 2uantity o(
i**as.
Note: every point on the PPC consists of pizza – robot pairs!
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"
8 ' a r g i n
a l # e n e f i t
& ! o s
t
8uantity of "i00as
= ;
.
;
2 3
roduction ossibilities
'!
'#
Allocative Efficiency: MB=MC
'#>'!
Two %tep rocess%tep "ne5
1.+ind the allocativelye((icient 2uantity o( i**as.
Iou are loo ing at the > andC associated with the
production o( di((erent2uantities o( pi**as.
The 2uantity o( pi**as where>@ C is the allocativelye((icient 2uantity o( pi**as.
9::,:::5
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8
8
o ) o
t s 6 t % o u s a n
d s
7
"i00as 6%undred t%ousands7
/32
. 4 9 5 : ; / 3 2
2 3 / ; : 5 9
A #
!
D
E
roduction ossibilitiesoint o( Allocative E((iciency
%tep Two5
9. Then (ind the 2uantity o( obots thatcorrespond to that 2uantity o( i**as
J9::,:::K.
At 9::,:::, go up to the C, then go le(t,hori*ontally to the obot axis. The point
on the C where the vertical andhori*ontal lines intersect identi(ies the one
point o( allocative e((iciency.
Allocative e((iciency &eans 9::,:::
pi**as and L::: robots will &axi&i*e thesatis(action o( the society. >ut we &ust be
able to product that co&bo at least cost5
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8
8
o ) o
t s 6 t % o u s a n
d s
7
"i00as 6%undred t%ousands7
/32
. 4 9 5 : ; / 3 2
2 3 / ; : 5 9
U
U e)p'oy)e t 3U $ere)p'oy)e t
S/o+ -y Po% t U Sort o# '%8e to$"y! More o# e%t/er or
-ot/ %s poss%-'e
roduction ossibilities
E i G th
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T%e a)ility to produce a larger total output -a rig%tward s%ift of t%e "roduction "ossi)ilities
curve caused )y???
– Increase in resource supplies
2 – #etter resource @uality
3 – Tec%nological advances
Economic Growth
T%is is a #I DealB
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conomic
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"wo xamples ofconomic
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"wo xamples ofconomic
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!pplications222U e)p'oy)e t " $ Pro$uct%,e % e##%c%e cy
roduction ossibilities
•
The reat Depression o( the 1L8:)s• Mations experiencing signi(icant une&ploy&ent
and unused N under used production capacity.• Econo&ies that allow discri&ination o( any ind
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!pplications222U e)p'oy)e t " $ Pro$uct%,e I e##%c%e cy Tr"$eo##s " $ Opportu %ty Costs
roduction ossibilities
• %hould land be used (or oil production or preserved aswilderness?
• +ar&ing or waste disposal,
• %hould corn be used (or (uel or (ood?
• %hould society devote &ore resources to ho&eland
security or education?
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!pplications222• U e)p'oy)e t " $ Pro$uct%,e I e##%c%e cy
• Tr"$eo##s " $ Opportu %ty Costs•
S/%#ts % t/e Pro$uct%o Poss%-%'%t%es Cur,es
roduction ossibilities
• ore resources increase in nu&ber o( wo&en in thewor (orce.
• >etter 2uality resources wo&en beco&ing bettereducated and pro(essionally trained.
•
Mew technologies.
) ti t ti
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)ractice constructinganswers
• )lease thoroughly and completelyexplain "he )roduction )ossibilityModel
• Step 6 & write down the key points toinclude; in outline format
• Step 8 & add detail to each of the keypoints
• Step 3 & construct your response basedon this outline
>ou should at least have these
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>ou should at least have theseitems%escription of the model
!ssumptions of the model & list and explain= – full production and full employment – 7xed resources – 7xed technology
– two goods & capital and consumer goods4ey concepts & list and explain= – productive e ciency; de7ne; relate to the
curve – allocative e ciency ? de7ne; how to 7nd and
tool to use – conomic