Chapter 2

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