CHAPTER 2 The Economizing Problem Decision on factors of production Production Possibilities Curve Circular Flow

Thinking about different cultures In U.S. – emphasize our position in life. Is this at expense of environment, education, greater good? Where? Majority of U.S. concern for others? Examples. Does this mean U.S. way the only way? Tolerance Today…. Is this viable? Can it help our economy? How? Where?

Economic Wants (anything that can be purchased in the system.) Break Economic Wants down – Basic Social BASIC: (Food, Clothing, Shelter) SOCIAL: Microwaves, Refrigerator, High Speed Internet, Air Conditioning, Ipads,

Social Examples U.S. Households 90% have microwave ovens 88% have television in living room 87% subscribe to cable or satellite TV 77% own personal computer 72% have flat screen TV 68% have broadband Internet service 68% have television in their bedrooms.

Factors of Production Every economy works with these factors. Some have more resources, more capital, or more land, etc. Some economies do not encourage entrepreneurship. LAND LABOR CAPITAL ENTREPRENEURSHIP

PROPERTY RESOURCES LAND ECONOMIC RESOURCES 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.Scarcity 2.Choice 3.Opportunity Cost 4.Law of Increasing cost THE WAY EACH COUNTRY ANSWERS THESE 3 QUESTIONS… INDICATES THE TYPE OF ECONOMY THEY HAVE

Production Possibilities Curve PPC A B C D E F OUTPUT OF SHOES OUTPUT 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 up More 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 OUTPUT OF TELEVISIONS

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 means a limited output...

Production Possibility Q Q Pizzas (hundred thousands) A B C D E W Attainable but Inefficient Unattainable

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.

Q Q Robots (thousands) Pizzas (hundred thousands) U Unemployment & Underemployment Shown by Point U More of either or both is possible

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.. (does Congress have a social responsibility to reduce deficit?) 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 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.

Continued Overview Government steps in Market mechanism (market prices and sales to signal desire outputs - - or resource allocations.) (prices drive resources!!!) Government intervention/ command economies Market failure (imperfection in market prevents optimal outcomes) (housing bubble) 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? Subsidies to pet political projects?

WORKING MODEL OF THE ECOMONY Product Market Receive Goods & Services Payments for Goods & Services BUSINESSHOME Land,Labour, Capital, Entrepreneurs Rent, Wages, Interest, Profit Leakage Injection SavingsTaxes Investment Banks Leakage S + T = I + G Injection S+T > I+G = Recession I+G > S+T = Inflation Factor Market International Participants Government