Producing

1
Producing Trading
2
Introduction
3
Learning Objectives

• Explain why the scarcity problem induces
  individuals to consider opportunity costs
• Discuss why obtaining increasing increments of
  any particular good entails giving up more and
  more units of other goods

4
Learning Objectives (Continued)

• Explain why society faces a trade-off between
  consumption goods and capital goods
• Distinguish between absolute and comparative
  advantage

5
Scarcity

• Scarcity
• Occurs when the resources for producing things
  that people desire are insufficient to satisfy
  all wants
• Exists because human wants always exceed what can
  be produced with limited resources and time that
  nature makes available

6
Scarcity (Continued)

• What scarcity is NOT
• It is not a shortage. It exists even when we are
  not using all our resources.
• It is not the same thing as poverty. It occurs
  among the poor and among the rich. Low income
  levels do not create more scarcity. High income
  levels do not create less scarcity.

7
Production and Resources

• Production
• Any activity that results in the conversion of
  resources into products that can be used in
  consumption.
• It includes delivering things from one part of
  the country to another. It includes taking ice
  from an ice tray to put it in your soft drink
  glass.
• Resources or Factors of Production
• Inputs that are used to produce things that
  people want

8
Types of Factors of Production (Inputs)

• There are five types of resources
• Land
• Natural resources or the gifts of nature
• It includes all nonhuman gifts of nature,
  including timber, water, fish, minerals, and the
  original fertility of land.
• Labor
• The human resource, which includes all productive
  contributions made by individuals who work.

9
Types of Factors of Production (Inputs)
(Continued)

• Physical Capital
• All manufactured resources, including buildings,
  equipment, machines, and improvement to land that
  is used for production.
• Human Capital
• Accumulated training and education of workers.
  Whenever a workers training increase, human
  capital has been improved.

10
Types of Factors of Production (Inputs)
(Continued)

• Entrepreneurship (actually a subdivision of
  labor)
• Labor that organizes, manages, and assembles the
  other resources
• Risk taker
• Maker of basic business policy decisions

11
Goods Versus Economic Goods

• Goods are all things from which individuals
  derive satisfaction and are, thus, valued.
• Economic goods are goods and services produced
  from scarce resources.

12
Services

• Services
• Tasks that are performed for someone else, such
  as laundry, cleaning, hospital care, restaurant
  meal preparation, and teaching.
• One way of looking at services is thinking of
  them as intangible goods.

13
Scarcity

• Recall
• Scarcity occurs when the resources for producing
  things that people desire are insufficient to
  satisfy all wants.

14
Wants and Needs

• Needs Wants are not the same as needs. From the
  economists point of view, the term needs
• Are objectively un-definable
• Could be a wish, want, or a life-saving necessity
• Wants
• Desirable goods that people wish to have
• People have unlimited wants
• Hence, each person must make choices
• Whenever a choice is made to do or buy something,
  something else that is also desired is not done
  or not purchaseda cost is involved

15
Scarcity, Choice, and Opportunity Cost

• Opportunity Cost
• The opportunity cost of any action is the value
  of what is given up because a choice was made.

16
Scarcity, Choice, and Opportunity Cost

• Questions
• What is the opportunity cost of attending this
  economics class?
• What is the opportunity cost of attending a
  Rolling Stones concert?
• What is the opportunity cost of increasing
  research for an AIDS vaccine?

17
Scarcity, Choice, and Opportunity Cost
In economics, cost is always a forgone
opportunity
18
Scarcity, Choice, and Opportunity Cost
Limited Resources Unlimited Wants
19
The World of Trade-Offs
Whenever resources are used for any activity, the
user is trading off the opportunity to use those
resources for other things. The value of the
trade-off is represented by the opportunity cost.
20
The World of Trade-Offs

• Opportunity cost graphically
• The production possibilities curve (PPC)
  represents all possible combinations of total
  output that could be produced assuming
• (1)There is a fixed amount of productive
  resources, and
• (2) The efficient use of those resources

21
Example of PPC for Grades in Accounting
Economics (Trade-Offs)

• Assumptions
• (1) Only 10 hours can be spend per week on
  studying
• (2) There is one-to-one trade-off between grades
  in economics and in accounting, hence the graph
  is a straight linesee next slide for graph

22
ProductionPossibilities Curve (PPC)
23
(PPC) Production Possibilities Curve (Continued)

• Questions
• What would happen to the production possibilities
  curve if you spent more time studying?
• What would happen to the potential grades?
• Is it possible that the trade-off might not be
  constant?

24
Production possibilities assumptions (PPC)

• Resources are fully employed
• Production is for a specific time period
• Resources are fixed for the time period
• Technology does not change over the time period

25
Societys Trade-Off Between Network Computers and
Digital Televisions
26
Societys Trade-Off Between Network Computers and
Digital Televisions
Point R lies outside the PPC and is impossible
to achieve during the time period assumed. If
the nation is at point S, it means that its
resources are not being fully utilized. We have
unemployment. Point S is called an inefficient
point, which is defined as any point below the
PPC.
27
The Law of Increasing Relative Costs
The PPC is bow outward because of the law of
increasing relative cost
(12 million)
28
The Law of Increasing Relative Costs

• The opportunity cost of additional units of a
  good generally increases as society attempts to
  produce more of that good.
• The reason that we face the law of increasing
  relative cost (which causes the PPC to bow
  outward) is that certain resources are better
  suited for production of some goods than they are
  for other goods.

29
Question

• How does the specialization of resources
  influence the shape of the production
  possibilities curve?

30
Economic Growth and the Production Possibilities
Curve (PPC)

• Economic growth
• Increases the production possibilities of both
  network computers and digital televisions
• Occurs over a period of time
• Is illustrated by an outward shift of the
  production possibilities curveSee Next Slide

31
Economic Growth Allows for More of Everything
32
The Trade-Off Between the Present and the Future

• The PPC can be used to illustrate the trade-off
  between present and future consumption. See Next
  Slide

33
Capital Goods and Growth

• Consumer goods
• Goods produced for personal satisfaction
• Capital goods
• Goods used to produce other goods

Capital Goods per Year
Consumption Goods per Year ( trillions)
34
Capital Goods and Growth
Capital Goods per Year
Recreation per Year
A
Today
B
5
4
Consumption Goods per Year ( trillions)
Food per Year
35
Capital Goods and Growth
Capital Goods per Year
A
B
Consumption Goods per Year ( trillions)
36
Capital Goods and Growth
Future growth as a result of A on the left-hand
diagram
Recreation per Year
Capital Goods per Year
A
Today
B
5
4
Consumption Goods per Year ( trillions)
Food per Year
Future growth as a result of C on the left-hand
diagram
C
Capital Goods per Year
Recreation per Year
A
Today
B
Consumption Goods per Year ( trillions)
Food per Year
37
Capital Goods and Growth

• Observations
• Forgo consumption goods to produce more capital
  goods
• Increase in capital goods stimulates economic
  growth
• The more we give up today, the more we can have
  tomorrow, provided, of course, that the capital
  goods are productive in future periods

38
Capital Goods and Growth

• Observations (Continued)
• In the future the economic system can produce
  more consumer goods
• An increase in capital goods will lead to a
  higher rate of economic growth in the future

39
Specialization and Greater Productivity

• Specialization
• The division of productive activities among
  persons and regions so that no one individual or
  one area is totally self-sufficient
• Leads to greater productivity, not only for each
  individual but also for the nation

40
Absolute Advantage

• The ability to produce more units of a good or
  service using a given quantity of labor or
  service inputs, or
• The ability to produce the same quantity of a
  good or service using fewer units of labor or
  resource inputs

41
Comparative Advantage

• The ability to produce a good or service at a
  lower opportunity cost compared to other products
  (goods or services).

42
Division of Labor

• Assigning different workers different tasks to
  produce a good or service
• Examples
• Automobile production
• Hospital operating room

43
Division of Labor (Continued)

• The best-known example comes from Adam Smith, who
  in his book The Wealth of Nations showed the
  benefits of a division of labor in the making of
  pins.

44
Comparative Advantageand Trade Among Nations

• Question
• Why trade?
• Answer
• Comparative advantage and specialization
  increases output (production) and income

45
Comparative Advantageand Trade Among Nations
(Continued)

• Trade in U.S. between agricultural states and
  manufacturing states
• Question
• Why limit trade among nations?

Student Will Answer
46
Gains from Trade

• Comparative Advantage
• A person or nation has a comparative advantage in
  an activity if they/it can perform an activity at
  a lower opportunity cost than others.
• Why is there a difference?
• Differences in abilities
• Differences in resource characteristics

47
Comparative Advantage (Example)

• Toms Factory
• Can produce 4,000 lengths of tape/hour or
• Can produce 1,333 cases/hour
• Opportunity Cost
• To produce 1 case, he must decrease tape
  production by 3 lengths (4,000/1,333)opportunity
  cost.
• To produce 1 length of tape, he must decrease
  case production by 0.333 case (1,333/4,000)opport
  unity cost.

48
Comparative Advantage (Example Continued)
5
4
Toms opportunity cost 1 tape costs 1/3 case,
and 1 case costs 3 tapes
3
Cases (thousands per hour)
2
Toms PPF
1
1 2 3 4
Tape (thousands of lengths per hour)
49
Comparative Advantage(Example Continued)

• Nancys Factory
• Can produce 1,333 lengths of tape/hour or
• Can produce 4,000 cases/hour
• Opportunity Cost
• To produce 1 case, she must decrease tape
  production by 0.333 lengths (1,333/4,000)opportun
  ity cost.
• To produce 1 length of tape, she must decrease
  case production by 3 cases (4,000/1,333)opportuni
  ty cost.

50
Comparative Advantage(Example Continued)
5
4
Nancys opportunity cost 1 tape costs 3 cases,
and 1 case costs 1/3 tape
3
Cases (thousands per hour)
2
Nancys PPF
Nancys PPF
1
1 2 3 4
Tape (thousands of lengths per hour)
51
Comparative Advantage(Example Continued)
5
4
3
Cases (thousands per hour)
2
Nancys PPF
Nancys PPF
1
1
Toms PPF
1 2 3 4
Tape (thousands of lengths per hour)
52
Comparative Advantage (Continued)
5
Toms opportunity cost 1 tape costs 1/3 case,
and 1 case costs 3 tapes
Nancys opportunity cost 1 tape costs 3 cases,
and 1 case costs 1/3 tape
b'
4
4
3
Cases (thousands per hour)
c
2
Nancys PPF
Nancys PPF
Trade line
a
1
1
Toms PPF
b
1 2 3 4
Tape (thousands of lengths per hour)
53
Comparative Advantage (Continued)
5
Nancys opportunity cost 1 tape costs 3 cases,
and 1 case costs 1/3 tape
Toms opportunity cost 1 tape costs 1/3 case,
and 1 case costs 3 tapes
b'
4
4
Cases (thousands per hour)
3
c
2
Nancys PPF
Nancys PPF
Trade line
a
1
1
Toms PPF
b
1 2 3 4
Tape (thousands of lengths per hour)
54
Comparative Advantage

• Production Tape/Hour Case/Hour
  Opportunity Cost
• Thom Factory 4,000 1,333
  1 case 3 tapes
• Nancy Factory 1,333 4,000
  1 tape 3 cases

Producers should producer the good in which they
have the lowest opportunity cost in its
productionThom should specializes in tape
production, and Nancy in case production, and
then engage in trade.
55
Absolute Advantage

• An absolute advantage exists when a person or
  nation can produce more of a good than another.
• Individuals and nations can have absolute
  advantages in any or all goods.
• However, it is not possible to have a comparative
  advantage in everything.

56
Dynamic Comparative Advantage

• People or nations can become more productive
  simply by repetition--learning-by-doing.
• Dynamic Comparative Advantage results from
  learning-by-doing.
• Examples Hong Kong, South Korea, Taiwan

57
The Market Economy

• Market
• A market is any arrangement that enables buyers
  and sellers to get information and to do business
  with each other.

58
Circular Flows in the Market Economy

• Describes the flow of resources, products,
  income, and revenue among the four decision
  makers (Households Firms Output Market Input
  Market.)
• See the next slide too

59
Circular Flows in the Market Economy
A- Households supply resources in the resource
market and demand goods and services in the
product market
B- Firms supply goods and services in product
market and demand resources in the resource market
C- Money flows in resource market determine
wages, interest, rents, and profits which flow as
income to households
D- Product markets determine the prices for goods
and services which flow as revenue to firms
60
Coming Up (Ch. 3 4) Supply Demand Theory
and Practice