Chapter 2: The Economizing Problem

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Chapter 2 The Economizing Problem

• Content and visuals taken from McConnell/Brues
  Economics

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It All Starts with Making Choices

• Every single person makes economic choices every
  single daymost of us make lots of them
• Scarcity forces us to make choices since
  everything is LIMITEDwe cant have it all so we
  must give things up, which creates a COST for
  every choice

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Offer me the World and I will take the World

• Whether or not you realize it, we ALL have
  unlimited wants
• Even if you feel you are content with everything
  you have you WOULD still like to have morelets
  run a test shall we
• Who wants all the money I have in my pocket right
  now? First to raise their hand gets it.
• Verifiable proof that we all want more

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NEEDS vs WANTS

• Complete the following sentence in your head I
  want ________, but I need _____.
• Whats the difference?
• Necessities are typically provided for usever
  ask for a sandwich for Christmas?
• Probably not but a 60 gig iPod video sounds nice
  right?

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Filling up your tank

• Overall our needs are INSATIABLE or
  UNLIMITEDweve clearly established that
• However, we can have our fill of individual goods
  so that we do not desire more of them
• Give me an examplewhat dont you want more of?
• Ah, the difference between NORMAL and INFERIOR
  GOODS!!!
• The main objective of all economic activity is to
  meet our own personal wants!!!

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• OPPORTUNITY LOST VIDEO

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Scarcity Makes us Choose

• You may have guessed that certain concepts and
  themes will be emphasized all year longget used
  to it!
• Some things will be so driven into your skulls
  that you will cry out about them in your sleep.
• Scarcity is one of those thingsscarcity, along
  with EFFICIENCY, is one of the twin themes of
  economics
• Everything is limited which makes us choose how
  we use it
• This includes all of the PROPERTY RESOURCES
  (LAND, RAW MATERIALS, AND CAPITAL) as well as the
  HUMAN RESOURCES (LABOR AND ENTREPRENEURIAL
  ABILITY)

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Making PIE!!!

• Right now with a partner, make a list of
  everything you would need to make cookiesyou
  have two minutes.
• What we will find is that all of our resources
  can be grouped into 4 categories, known as the
  FACTORS OF PRODUCTION (go back to the sleep thing)

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LAND

• All the natural resources used to make something
  that are present in the final product
• Includes all the stuff from the earth directly as
  well as the stuff that we produce first like
  wood, fiber optic cables, and sprinkles

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CAPITAL

• Anything that we first make in order to help make
  something else, but is NOT part of the final
  product
• A hammer is essential for building a canoe but is
  considered capital, not land
• Can differentiate as well between HUMAN AND
  PHYSICAL CAPITAL
• Human-stuff between your earsknowledge, skills,
  and training that enable you to do something
• Physical-tools, machinery, and equipment you use
• Also a difference between CAPITAL AND CONSUMER
  GOODS
• Consumer is bought for your own use while capital
  is bought to use in making something else

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LABOR

• Any human effort, physical or mental, used to
  produce goods or services
• Every job involves some degree of labor
• Even teaching??? Name one occupation that is
  more labor intensive than teaching
• Your wrongIve done that and its not nearly
  this hard!!!

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ENTREPRENEURIAL ABILITY

• In principles we considered human capital our 4th
  factor of production
• This is a similar concept so I guess we can have
  5 factors if you like
• If you take all the letters of this big, long,
  hard to spell word and combine them together they
  form a much smaller wordNEW

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• WHAT???
• Important side notethe most idea to grasp in
  this class is that I DO NOT CARE IF YOU
  UNDERSTAND for about 5 more monthsit simply
  doesnt matter
• All you need to do for the time being is take
  things as given D E G 5 and simply know
  them and be able to apply them in a random
  situation
• I really do not care if you understand why it is
  that way it simply is
• In fact, I encourage you not to attempt to
  understand this contentit wont help!
• All you need to do is TRUST ME!!!

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Back to the Content

• In summary, an entrepreneur is someone who
  creates something newa new idea, process,
  product
• Its someone who comes up with an idea and takes
  a risk to attempt to make that idea profitableif
  successful they might get richif not they bear
  the loss

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What about MONEY?

• Where would you put money? Which of the four, or
  five, would you consider it to be?
• Its actually none of the above
• It can be USED for purchasing a factor of
  production, but in itself it is NOT an economic
  resource

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WIRP

• We know what all the factors are, now we have to
  identify the payment for providing them
  (technicality thing)
• Wages are payment for Labor
• Interest is payment for Capital
• Rent is the payment for Land
• Profit is the payment for entreship

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Pop Quiz

• What are the two twin themes of economics?
• Scarcitylimited resources makes us choose
• EFFICIENCYsince everything is limited we want to
  make the best possible use of what we have

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• Economics itself is just the social science
  dealing with the problem of finding the best way
  to use our limited resources to gain the best
  value or benefit (UTILITY) for society
• In order to make the most stuff, we must make use
  of all of our resources, a term known as FULL
  EMPLOYMENT
• Question, do we use everything? Why or why not?
• Full employment measures the use of resources
  that we choose to have available for usenot
  those we dont

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BIG TECHNICALITY PAGE

• If we are not at full employment then we are at
  UNDEREMPLOYMENT, or UNDERUTILIZING our resources
• Huge thing nextmemorize know
• PRODUCTIVE EFFICIENCYproduction in the LEAST
  COSTLY way (P min ATC)
• ALLOCATIVE EFFICIENCYproduction in the MOST
  VALUED way (MB MC or P MC)
• Big, big, big differenceconsider value of a home
  cooked meal or handmade furniture

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TIME OUT

• Take a sheet of paper and make your choice of
  paper footballs or crumpled ballsyou have 2
  minutesGO

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Productive Possibilities Curve

• Our goal then becomes to use everything in the
  most efficient manner possible
• Assuming that we do this (full employment and
  productive efficiency), given a fixed amount of
  resources and technology we can graphically
  represent how much of two things we could make
• Using your sheet of paper how many footballs
  could you make? Crumpled balls?
• What different combinations of the two could you
  make?

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• If you used all of your available paper, you
  could produce any number of combinations
• However, if you used it all and produced
  combination x,y you would not be able to make
  more of one without sacrificing one/some of the
  other
• When using everything, there is a COST associated
  with increasing production of anythingyou give
  something else up to get more of it
• Consider the idea of growing wheat or rice

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• If two goods can be produced using the same
  resources in the same quantities, what would a
  graph of the combinations look like?
• Straight, downward sloping line
• What about rice and wheat? If you give up one
  acre of land in Lewisburg to grow some rice
  instead of wheat are you going to get as much?
• Only if its during a flood!!! Ha ha ha

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• This example is meant to demonstrate the LAW OF
  INCREASING COSTS
• Assuming your resources are not equally good at
  producing two different things, as you shift to
  producing only one or the other the cost will
  rise as you reach the extremes
• In other words, in order to get more of one you
  are forced to give up a ton of the other
• Demonstrated by graph that bows

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• OPPORTUNITY COST VIDEO 1

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Using a graph to calculate opportunity cost

• Any PPC can be used to calculate the opportunity
  cost (same thing as cost but fancier for US
  intelligent economists who like to study
  oligopullies)
• Since a cost is what you give up, the cost can be
  calculated by looking at the distance shifted
  horizontally or vertically in the direction you
  point of production moved
• That distance is your opportunity cost

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PRODUCTIVE VS ALLOCATIVE

• Two VERY, VERY important concepts for us
• Productive implies maximum production as depicted
  by the PPC
• Allocative implies most valued combination
• How do we determine the most valued combination?
• Question, how do you decide whether or not you
  buy something, for example this marker?

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• As a rule we buy things whenever the benefit we
  get from them (UTILITY) is greater than the price
  we have to pay (COST)
• As long as the MARGINAL BENEFIT is greater than
  the MARGINAL COST, with marginal always meaning
  additional or extra, it makes sense to buy the
  product
• If the MB MC then you are UNDERALLOCATING
  resources to itbuy more since the benefit
  outweighs the cost
• If the MC MB then you are OVERALLOCATING since
  the cost outweighs the benefit

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• Our ultimate goal becomes production at the point
  in which
• MU MB MC

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Stipulations to clarify

• Point of production can be inside the PPC
• The curve itself can shift in or out with GROWTH
  or loss of resources
• IMPORTANT!!! THE PPC ALWAYS DEPICTS MAXIMUM
  PRODUCTION ASSUMING THE FULL USE OF ALL RESOURCES
  AND TECHNOLOGY!!!
• Unemployment doesnt change it, but an increase
  in efficiency would

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• OPPORTUNITY COST VIDEO 2

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TIME OUT

• Take a two minute break and find something in
  this room that was made in the USAGO
• Why do we trade? Does it actually help us?

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• Whether we realize, or like it, or not foreign
  trade helps us all receive more than we could
  have produced on our own

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US PPC Growing???

• Would you say our PPC or economy is growing?
  Why?
• What drives this growth? Think factors
• Is it the constant discovery of more stuff or the
  improvements in technology that simply allow us
  to produce more with the same amount.
• In 1975 the same number of plastic grocery store
  bags would have filled a tractor trailer truck as
  bags today can fit inside a Geo Metro

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Almost done Slide

• Everybody and country has to decide what to do
  with their limited resources
• When a country decides it creates an ECONOMIC
  SYSTEM, which is simply how they answer WHAT,
  HOW, FOR WHOM things get produced
• All economies (nations) have to answer these same
  three questions, but every nation is also
  different
• Depends on who owns the factors and the method of
  coordinating market activity

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Market vs Command

• Also called CAPITALIST
• Buyers and sellers individually answer the three
  questions
• With LAISSEZ-FAIRE there is no govt
• Most nations today, USA included, have a govt
  but typically allow the private sector to control
  the economy

• Also called CENTRALLY PLANNED
• Includes SOCIALISM AND COMMUNISM
• Govt answers the three questions
• Historically will all fail due to lack of
  INCENTIVE
• We still have some today?how?

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Do You Control Wal-Mart?

• We just established that individual buyers and
  sellers control a market economy does that mean
  you have as much control as Wal-Mart?
• We will get to that later in detail, but in a
  word YES
• In a market there are two groupsindividuals and
  businesses
• In the RESOURCE MARKET, individuals sell their
  factors to businesses
• In the PRODUCT MARKET, businesses sell their
  products back to individuals
• CREATES NEVERENDING TWO-WAY CYCLE AS FACTORS AND
  PRODUCTS FLOW BACK AND FORTH

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SUMMARY

• KNOW THE ENTIRE CHAPTERLITERALLY
• Scarcity Efficiency
• Factors of production
• PPC, productive vs allocative
• Economic systems
• Circular Flow model