2. CHAPTER 2 T HE E CONOMIZING P ROBLEM Why are you taking this economics class? What would you rather be doing?

3. F ACTORS OF P RODUCTION 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

4. PROPERTY RESOURCES LAND ECONOMIC RESOURCES Land- all the bounties of nature- land, minerals, water. What gives land value?

5. L ABOR 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.

6. C APITAL

7. I N THE FACTORS OF PRODUCTION C APITAL 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)

8. W HAT 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.

9. T HINKING H AT T IME Name some Entrepreneurs today?

10. E CONOMIC M ODELS 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

11. 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

12. P RODUCTION P OSSIBILITIES C URVE PPC A B C D E F OUTPUT OF SHOES 5 4 3 2 1 012345 OUTPUT OF TELEVISIONS

13. N OTE D IFFERENCE IN S HAPE OF C URVE 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

14. I NCREASING O PPORTUNITY C OSTS 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 012345 OUTPUT OF TELEVISIONS

16. 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...

17. P RODUCTION P OSSIBILITY Q Q Pizzas (hundred thousands) 14 13 12 11 10 9 8 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8 A B C D E W Attainable but Inefficient Unattainable

18. L AW OF I NCREASING O PPORTUNITY C OSTS 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.

19. Q Q Robots (thousands) Pizzas (hundred thousands) 14 13 12 11 10 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 or both is possible

20. E CONOMIC G ROWTH The ability to produce a larger total output - OR a rightward shift of the production possibilities curve caused by... ????????

21. PPF AND E CONOMIC G ROWTH

22. R ESEARCH AND D EVELOPMENT 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?

23. T IME TO T HINK … 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.

24. B UILDING A C ONCEPT 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!!!

25. 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.

26. T RADE I NSIGHTS Trade=exchanging one thing for another. Usually goods or services for $$. The economics profession nearly unanimously backs free trade.

27. So…………. If economists agree that Free Trade is a good thing….. Why all the fuss politically and internally about 1) jobs fleeing the country 2) unfair advantages for subsidies/ 3) what is in-sourcing?

28. “N O NATION WAS EVERY RUINED BY TRADE.” B ENJAMIN F RANKLIN 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.

29. D ICK AND J ANE CAN BOTH BUILD BOATS Both can build boats/cars Dick can build more cars in less time than Jane Jane can build more boats than Dick Dick 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.

30. D ECIDING 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 thing Look for lowest opportunity cost But Elizabeth Opportunity Cost 1B=1A, 1A=1B Brian 1B = 3A, 3A =l/3B Elizabeth and Brian both like bread and apples And live close to each other (given)

31. T ERMS OF THE TRADE Elizabeth 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. Now Elizabeth and Brian decide to trade 8 loaves of bread for 12 apples. = Terms of Trade Elizabeth bakes bread trades 8 to Brian. Brian produces apples and trades 12 to Elizabeth

32. C OMPARATIVE A DVANTAGE B ONUS Remember terms of trade 8 loaves for 12 apples…. Elizabeth now consumes 12 loaves bread and 12 apples Brian consumes 8 loves of bread and 18 apples Clearly both are better off… See first column above! Trade works…. But free trade works great.

33. A BSOLUTE A DVANTAGE Elizabeth can bake bread better and faster and can produce apples better and faster. Brian is left out in the cold!

34. P ROGRESS = DIVISION OF LABOR AND SPECIALIZATION. Production Increases Division and Specialization of Labor example: task become repetitious task 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!

35. T HE INVISIBLE HAND PERMEATES THROUGHOUT OUR ECONOMY. E VEN 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.

36. W HAT ABOUT I NTERNATIONAL T RADE ? Outsourcing? Examples being sent over today: customer service, telemarketing, document management, law research, basic labor tasks Insourcing? www.dice.com

37. W HAT KIND OF AN ECONOMY IS IT ? Capitalism SocialismCommunism

38. W HAT 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.

39. W HAT IS C APITALISM ? 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.

40. D EGREES OF S OCIALISM -J UST LIKE DEGREES OF C APITALISM.

41. F REEDOMS MEASURED BY ECONOMIES CAPITALISM SOCIALISM Most Reduced Quasi-Balanced Increased Least COMMUNISM Freedom measured by degrees

42. MARXISM 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.

43. S UMMARY C OMMAND 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.

44. T AKE A LOOK AT A TYPICAL GROCERY STORE Cuba U/S

45. W HAT IS M ARKET F AILURE ? When the market produces more or less than the ideal optimal good or service. OR the wrong mix of input is given for output….. Brings about externalities and public goods.

46. W HEN THE MARKET FAILS … IT IS A DOUBLE EDGE SWORD Market Fails if not optimal mix. * Optimal Mix of Output …… “Most desirable combination of output attainable with existing resources, technology and social values.” Market Failure *“An imperfection in the market mechanism that prevents optimal outcomes.”

47. I N REAL WORDS ? Not enough public parks… Not enough care for environment… Not enough welfare… Too much separation between top 10% income earners and median income earners… Not adequate security within our borders…. Too many immigrants….

48. T HREE AREAS OF CONCENTRATION 1.Explain how market failures, such as externalities, might justify economic functions of government 2. Distinguish between private and public goods and explain the nature of the free-rider problem 3. Describe the political functions of government that entail its involvement in the economy

49. T RADE AND G ROWTH ARE G OOD !