Chapter 2 – The Economizing Principle
The Foundation of Economics
Economizing principle – is that societies wants are impossible to supply because economic means of production are limited
Unlimited Wants
Necessities – food, shelter, clothing and Luxuries – Yahts, second homes etc
Goods and services are interrelated bc goods often replace/represent labor
THE OBJECTIVE OF ALL ECONOMIC ACTIVITY IS TO FULFILL WANTS
Scarce Resources
Economic resources – all natural human and manufactured resources that go into the production of goods and services
Resource categories/FACTORS OF PRODUCTION – Land, Capital (tools machinery factories === investments that aid in the production of consumer goods), Labor, Entrepreneurial Ability (takes the inititiative to combine resources to make a good or service, makes strategic business decisions, innovator, risk bearer)
Resource Payments – income received from supplying raw materials and capital investments is called rental income and interest income respectively, income to a person is called wages and entrepreneurial income is called profits
Relative Scarcity – the four types of economic resources or factors of production are all scarce/limited
Full employment – using available resources… necessary for the maximum productivity of a nation
Full production – using resources efficiently
All employed resources must be used such that they provide the maximum economic satisfaction of our wants
Productive efficiency – the most efficient way to produce goods
Allocative efficiency – producing what consumers demand, allocating resources to provide the relevant goods necessary
Production Possibilities Table – determines which goods are worthwhile to produce based on necessities and market
Assumptions – Full employment and productive efficiency , Fixed Resources available supplies of the factors of production ie land, minerals and shit, Fixed technology the state of technology and how it can be applied, Two goods for this example there will be capital goods (industrial robots) and consumer goods (pizzas)
The Need for Choice
Must allocate resources to either consumer or capital goods, a production possibilities table lists the different combinations of two products that can be produced with a certain fixed amount of resources, Must find a balance between capital and consumer goods
Production possibilities curve – much like the table, you can illustrate the tradeoff between distinct areas of production by graphing each good on a separate axis
Law of increasing opportunity cost
Opportunity cost – the value of objects that could potentially be produced in order to produce an item.
Law of increasing opportunity cost – the more goods you produce, the greater their successive opportunity cost
Shape of a curve
The graph is concave down so as the number of product A is produced, it occurs at the cost of successively more of Product B
This is all because goods are finite and not perfectly adaptable to multiple items ie if you wanted to increase grain production then at a certain point you’d run out of optimal farmland and would have to make do we less fertile land
Allocative Efficiency – resources must be allocated to each product to optimize utility
Increase production until marginal benefits are equal to marginal costs
If society values a good at more than the price it costs to produce it, then more should be produced
Unemployment and Productive Inefficiency
Unemployment is a wasted resource and thus on a Productivity curve it lies underneath the curve. If full employment was achieved, either one or both product would increase in production
Increase in resource supplies
Historically a nation’s stock of capital increases
Production possibilities increase
Increase in technology
Technological advances shift the scale of the production curve larger
Present Choices and future possibilities
Goods for the future – capital goods, research, education
Eventually future possibilities pay off in higher production
A qualification - International trade
Production efficiency is diff with international trade
International specialization – direct a very plentiful domestic resources towards producing something that the nation is efficient at producing
Unemployment and productive inefficiency
Sometimes with massive unemployment ie Depression a nation operates inside its possibility curve
Tradeoffs and Opportunity costs
Also opportunity costs/tradeoffs in services ie education, justice system etc
Shifts in Production Possibilities
Recently women have started working more (40% in 1965 60% in 2005) also women now have higher education
Also technology has gotten a lot better
Economic Systems
The Market System
Capitalism – private ownership of capital, communicates through prices, activity in markets where goods are bought and sold determining price
Laissez-faire capitalism – means “let it be”, Adam Smiths idea of a totally free market
US Capitalism – gov interferes quite a bit, promotes economic stability and growth, provides certain goods and services that otherwise wouldn’t be produced, modifies the distribution of wealth
The Command System
Communism/socialism – gov’t owns most property and resource, gov’t decides how to use them
Usually there is some private ownership (ie Russia China)
The Circular Flow Model – has two groups of decision makers – households and businesses
Resource Market – the market where resources/labor are bought and sold. Households sell, businesses buy. People own businesses, sell resources to businesses
Product Market – The place where goods and services produced by businesses are bought and sold, People use the money from their income to buy shit
Households to Resource Market – exchange the resources (land labor capital, entrepreneurial ability) for wages and profits
Resource Market to Businesses – Businesses exchange raw resources for money
Businesses to Product Market – Businesses produce goods and services and sell them to the product markets
Product Market – Sells the goods and services of the business to the Consumers (household) in exchange for consumption expenditure
Counterclockwise flow of real resources/goods products and a Clockwise flow of money
Gross Nat’l Debt went from 800 Billion to 4.5 trillion between Jimmy Carter and Ronald Reagen, Clinton decreases to b/c Capital goods of star wars develpmnt increased under Reagen
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