1. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin The Economic Organization Of Society Chapter 2

2. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 2 Laugher Curve Q. How many Marxists does it take to screw in a light bulb? A. None. The bulb contains within itself the seeds of its own revolution.

3. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 3 Introduction u An economic system must coordinate individuals' wants and desires.

4. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 4 Introduction u An economic system has to solve three coordination problems: l What, and how much, to produce. l How to produce it. l For whom to produce it.

5. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 5 Introduction u Every economy faces the problem of how to make individuals do what society wants them to do.

6. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 6 Introduction u Sometimes the goals of society and individuals conflict. l An example is the NIMBY (Not In My Back Yard) phenomenon. l NIMBY was a 1990s mindset in which individuals approve of a project so long as it is placed somewhere else.

7. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 7 Introduction u One problem every economy faces is what to do with individuals who want to do what "society" does not want them to do.

8. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 8 Introduction u An economic system must give the incentive to do those things that alleviate scarcity—produce more and consume less.

9. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 9 Introduction u The coordination problems faced by society are immense.

10. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 10 Introduction u The two main economic systems of the past 50 years, capitalism and socialism, answer these coordination problems differently.

11. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 11 Capitalism u Capitalism is an economic system based upon private property and the market in which, in principle, individuals decide how, what, and for whom to produce.

12. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 12 Under Capitalism: u Individuals are encouraged to follow their own self-interest, while market forces of supply and demand are relied upon to coordinate those individual pursuits.

13. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 13 Under Capitalism: u Distribution of goods is to each according to his or her ability, effort, or inherited property.

14. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 14 Under Capitalism: u Government must allocate and defend private property rights. l Private property rights – the control a private individual or firm has over and asset or a right.

15. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 15 Reliance on the Market u Markets work through a system of rewards and payments. u Individuals are free to do whatever they want as long as it is legal.

16. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 16 Reliance on the Market u Prices coordinate individuals' wants. l If there is not enough of something, its price goes up. l If there is too much, price goes down.

17. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 17 What’s Good About the Market? u Most economists believe the market is a good way to coordinate individuals' needs.

18. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 18 What’s Good About the Market? u The primary debate among economists is about how markets should be structured, and whether they should be modified and adjusted by government regulation.

19. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 19 Socialism u Socialism is, in theory, an economic system based on individuals’ good will toward others, not on their own self- interest. u In principle, society decides what, how, and for whom to produce.

20. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 20 Socialism in Theory u Socialism is an economic system that tries to organize society in the same way as families are organized. u Everyone contributes what they can and get what they need.

21. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 21 Socialism in Theory u If individuals' inherent goodness will not make them consider the general good, government will force them.

22. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 22 Socialism in Practice u Economic systems based on upon people's goodwill have tended to break down.

23. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 23 Socialism in Practice u Socialism in practice is often called Soviet-style socialism. l Soviet-style socialism is an economic system that uses administrative control or central planning to solve the coordination problems what, how, and for whom.

24. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 24 Types of Economic Systems of the Past u Feudalism dominated the Western world from about the 8th to the 15th century. l Feudalism is an economic system in which traditions rule.

25. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 25 Evolving Economic Systems u Feudalism gave way to mechantilism. l Mechantilism is an economic system in which government determines the what, how, and for whom decisions by doling out the rights to undertake certain economic decisions.

26. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 26 Evolving Economic Systems u Mercantilism gave way to the Industrial Revolution. l Industrial revolution – a time when technology and machines rapidly modernized industrial production and mass produced goods replaced handmade goods.

27. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 27 Evolving Economic Systems u Capitalism evolved from the Industrial Revolution.

28. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 28 Evolving Economic Systems u Some economists prefer to call the system that evolved from mercantilism the market economic system—an economic system that relies on markets to coordinate economic activities.

29. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 29 The Need for Coordination in an Economic System u Every economic needs coordination – even capitalism.

30. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 30 The Need for Coordination in an Economic System u In his 1776 classic, Wealth of Nations, Adam Smith explained how markets could coordinate the economy without the active involvement of government.

31. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 31 The Need for Coordination in an Economic System u Markets coordinate economic activity by using the price mechanism to direct individuals' self-interest into society's interest.

32. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 32 Evolutionary Changes Within Systems u Both capitalism and socialism are constantly evolving with changes in social customs, political forces, and the strength of markets.

33. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 33 Evolutionary Changes Within Systems u A purer form of capitalism evolved into welfare capitalism—an economic system in which the market operates but government regulates markets significantly.

34. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 34 Evolutionary Changes Within Systems u The opposite took place in socialist nations—socialism integrated capitalist institutions into its existing institutions.

35. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 35 A Blurring of the Distinction Between Capitalism and Socialism u Recent events point to a blending of capitalism and socialism.

36. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 36 A Blurring of the Distinction Between Capitalism and Socialism u If this trend continues, the 21st century will see the emergence of a single general type of economic system, a blended capitalist-socialist system.

37. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 37 u The choices made by society are often presented in terms of a production possibility curve. The Production Possibilities Curve and Economic Reasoning

38. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 38 u The production possibilities curve shows the trade-offs among choices we make. The Production Possibilities Curve and Economic Reasoning

39. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 39 The Production Possibility Table u A production possibility table lists a choice's opportunity costs by summarizing what alternative outputs you can achieve with your inputs.

40. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 40 The Production Possibility Table u Three things to know to understand a production possibility table: l Opportunity cost – every decision has a cost in forgone opportunities. l Output – an output is simply a result of an activity. l Input – an input is what you what you put into a production process to achieve an output.

41. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 41 The Production Possibility Curve u A production possibility curve measures the maximum combination of outputs that can be achieved from a given number of inputs. u It slopes downward from left to right.

42. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 42 The Production Possibility Curve u The production possibility curve not only represents the opportunity cost concept, it also measures the opportunity cost.

43. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 43 The Production Possibility Curve u The production possibility curve demonstrates that: l There is a limit to what you can achieve, given the existing institutions, resources, and technology. l Every choice made has an opportunity cost—you can get more of something only by giving up something else.

44. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 44 Economics grade 100 88 70 46 40 5866789498 History grade 20 hours of history 0 hours of economics E D C B 20 hours of economics 0 hours of history A Hours of study in history Grade in history Hours of study in economics Grade in economics 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0 98 96 94 92 90 88 86 84 82 80 78 76 74 72 70 68 66 64 62 60 58 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 40 43 46 49 52 55 58 61 64 67 70 73 76 79 82 85 88 91 94 97 100 The Production Possibility Curve

45. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 45 Increasing Marginal Opportunity Cost u The production possibility curve is generally bowed outward since some resources are better suited for the production of some goods.

46. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 46 Increasing Marginal Opportunity Cost u The concept of comparative advantage explains why opportunity costs increase as the consumption of a good increases. l Some resources are better suited for the production of some goods than to the production of other goods.

47. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 47 Increasing Marginal Opportunity Cost Y 10 9 8 6 5 4 3 2 1 0. 2Y2Y 1X1X A X 1 2 3 4 5 6 7 8 9 If the slope of the production curve is -2 at A, the opportunity cost of 1X is 2Y. 7

48. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 48 Increasing Marginal Opportunity Cost u The principle of increasing opportunity cost states that opportunity costs increase the more you concentrate on an activity. u In order to get more of something, one must give up ever-increasing quantities of something else.

49. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 49 Increasing Marginal Opportunity Cost % of resources devoted to production of guns Number of guns % of resources devoted to production of butter Pounds of butterRow 0 20 40 60 80 100 0 4 7 9 11 12 100 80 60 40 20 0 15 14 12 9 5 0 A B C D E F

50. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 50 1211 Increasing Marginal Opportunity Cost A Butter Guns 479 0 1 gun 5 pounds of butter 5 9 15 3 guns 2 pounds of butter B C D E F 14 12 4 guns 1 pound of butter

51. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 51 Increasing Marginal Opportunity Cost Butter Slope is flat at A. Low opportunity cost of guns. Slope is steep at B. High opportunity cost of guns. Guns B A

52. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 52 Efficiency u In our production, we would like to have productive efficiency—achieving as much output as possible from a given amount of inputs or resources.

53. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 53 Efficiency u Efficiency involves achieving a goal as cheaply as possible. u Efficiency has meaning only in relation to a specified goal.

54. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 54 Efficiency u Any point within the production possibility curve represents inefficiency—getting less output from inputs which, if devoted to some other activity, would produce more output.

55. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 55 Efficiency u Any point outside the production possibility curve represents something unattainable, given present resources and technology.

56. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 56 Efficiency and Inefficiency Guns 10 8 6 4 2 0 2 4 6810 Butter CD A B Efficient points Inefficient point Unattainable point, given available technology, resources and labor force

57. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 57 Shifts in the Production Possibility Curve u Society can produce more output if: l Technology is improved. l More resources are discovered. l Economic institutions get better at fulfilling our wants.

58. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 58 Shifts in the Production Possibility Curve u More output is represented by an outward shift in the production possibility curve.

59. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 59 Neutral Technological Change Butter A B Guns 0 Shifts in the Production Possibility Curve C D

60. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 60 Biased Technological Change Shifts in the Production Possibility Curve 0 B A Butter Guns C

61. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 61 Distribution and Production Efficiency u The production possibilities curve focuses on productive efficiency and ignores distribution. u An increase in output that goes to one person and not to anyone else would not necessarily be efficient in some societies.

62. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 62 Distribution and Production Efficiency u U.S.economists often talk about efficiency as if it means productive efficiency and achieving society's goals. u In our society, more is generally preferred to less and many policies have relatively small distributional effects.

63. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 63 Examples of Shifts in the Production Possibility Curve u If more inputs are available for the production of X and Y equally, the PPC shifts out along both X and Y axes. u If fewer inputs are available for the production of X and Y equally, the PPC shifts in along both X and Y axes.

64. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 64 Examples of Shifts in the Production Possibility Curve u If more inputs are available for good X only, the PPC shifts out on the X axis only. u If more inputs are available for good Y only, the PPC shifts out on the Y axis only.

65. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 65 (a) (c) (d) (b) Examples of Shifts in the Production Possibility Curve

66. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 66 The Production Possibility Curve and Economic Systems u The production possibility curve presents choices in a timeless fashion but most choices are dependent on previous choices made sequentially with a time dimension.

67. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 67 The Production Possibility Curve and Economic Systems u Sequential decisions can best be seen within a framework of a decision tree— a visual description of sequential choices.

68. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 68 The Production Possibility Curve and Economic Systems u Low-level choices are choices that involves general acceptance of the path one has taken. u Institutional choices are choices that make major institutional changes.

69. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 69 The Production Possibility Curve and Economic Systems u Systemic choices are fundamental choices that determine the set of institutional and low-level choices available.

70. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 70 The Production Possibility Curve and Economic Systems u All decisions are made in context – what makes sense in one context may not make sense in another.

71. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 71 The Production Possibility Curve and Economic Systems u Decisions are contextual. l What the production possibility curve for a particular decision looks like depends on existing institutions l The analysis can be applied only in the institutional and historical context.

72. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 72 A Decision Tree Low-level decisions Institutional decisions Systemic decisions BA

73. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 73 The Production Possibility Curve and Tough Choices u The production possibility curve represents tough choices.

74. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 74 The Production Possibility Curve and Tough Choices u Politicians make promises as though the production possibility curve did not exist or that the economy can operate outside the economy's production possibility curve.

75. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 75 The Production Possibility Curve and Tough Choices u Economists continually point out that seemingly free lunches often involve significant costs thus earning for themselves the nickname, the dismal science.

76. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 76 Comparative Advantage, Specialization, and Trade u The production possibility curve becomes bowed out when individuals specialize in the production of goods for which they have a comparative advantage and trade with others.

77. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 77 Comparative Advantage, Specialization, and Trade u The comparative advantage argument used to explain the bowed-out shape of the production possibilities curve can be used to show how trade makes society better off.

78. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 78 Comparative Advantage, Specialization, and Trade u Collaboration and specialization can make society better off. u Total production can rise.

79. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 79 Comparative Advantage, Specialization, and Trade u The outward bow graphically represents the potential gains from trade.

80. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 80 The Gains From Trade u Sunder can either write one economics paper or four creative writing papers in a day. u Ti can either write one creative writing paper or four economics papers in a day.

81. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 81 The Gains From Trade u Sunder has a comparative advantage in creating writing and Ti has a comparative advantage in economics.

82. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 82 The Gains From Trade u The following table and production possibility curves demonstrate how output increases when two individuals collaborate and specialize in the activity for which each has a comparative advantage.

83. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 83 The Gains From Trade

84. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 84 The Gains From Trade

85. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 85 The Gains From Trade u Each individual's PPC is drawn by connecting the number of papers each can write in a day on a graph.

86. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 86 The Gains From Trade Economics 1 2 3 4 5 4 3 2 1 5 (b) Sunder (a) Ti Creative writing

87. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 87 The Gains From Trade u The combined PPC curve is drawn by finding three points and connecting them.

88. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 88 The Gains From Trade Economics 1 2 3 4 5 (c) Combined with trade 4 3 2 1 5 (b) Sunder (a) Ti B C A Creative writing

89. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 89 The Gains From Trade u Point A: This is the combined number of economics papers they both can write in a day. u If economics papers are on the Y axis, it is point 0,5.

90. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 90 The Gains From Trade u Point B: This is the combined number of creative papers they both can write in a day. u If economics papers are on the Y axis, it is point 5,0.

91. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 91 The Gains From Trade u Point C: This is where each is focusing on that activity for which he or she has a comparative advantage. u Sunder writes four creative papers and Ti writes four economics papers. u This is the coordinates 4,4.

92. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 92 The Gains From Trade u The combined PPC is bowed out because of Point C – comparative advantage and specialization.

93. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 93 The Division of Labor u Markets allow specialization and the division of labor. u They allow individuals to develop their comparative advantages, thereby increasing the production possibilities of society.

94. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 94 Markets, Specialization, and Growth u Markets and specialization have led to growth.

95. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 95 Markets, Specialization, and Growth u The growth in per capita income (constant 1990 dollars) in the past 2 millennia has been astonishing. u This owes largely to the introduction of markets and democracy.

96. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 96 Markets, Specialization, and Growth u As people are allowed to compete and specialize, they get better at what they do, develop new technologies and the market grows ever larger.

97. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 2 - 97 Growth in the Past Two Millennia $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 2000150010005000 Per capita income (in 1990 international dollars)

98. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin The Economic Organization Of Society End of Chapter 2