Economic Growth and Scarcity Economics Lesson 2

Lesson #2 Learning Targets: Understand that people choose, and individual choices are the source of social outcomes. Understand that choices impose costs; people receive benefits and incur costs when they make decisions. Success Criteria -I can identify the opportunity and marginal costs of different scenarios -I can explain ways in which economic growth raises standards of living. -I can list economic instutions that foster economic growth and development.

Hypothesis for the course: Human prosperity and social cooperation develop spontaneously in societies that protect private property rights and encourage voluntary trade.

Why Should We Care? Picture is link to video

Why Can’t You Have It All? SCARCITY: the FACT that resources are limited and human wantsandneeds are unlimited Not enough to go around!

Economic Reasoning Principle #1: People choose, and individual choices are the source of social outcomes. Scarcity necessitates choices: not all of our desires can be satisfied. People make these choices based on their perceptions of the expected costs and benefits of the alternatives. Make a transition from the general topic of world poverty – to economic reasoning tools 8

Why can’t we have all we want? Available resources are limited Land (57,506,000 sq mi. & not even all habitable!) Labor (6,7 bil. souls x 24 hrs a day) Capital (less than ∞, trust me) Entrepreneurship (not everybody is Bill Gates) Human desires are boundless We can never quite have it all, there is always a desire lurking in the back of our mind. We WILL be hungry again tomorrow, we will be thirsty this afternoon. We will salivate over that next chocolate bar even if we had eaten a thousand of them to this day. It is our unfortunate predicament that the available resources will never quite match our desires and needs. What do we call this? Scarcity.

Are YOU Never Satisfied ? It’s not just you out there

Scarcity forces us to choose

Scarcity implies the need to make CHOICES! So… Although we cannot have it all… …we still can have SOME of it. What shall we have? How much of it? How shall we produce it? Who will get it? Scarcity implies the need to make CHOICES! Mention at the end: some choices are wiser than others, i.e. some deal better with that problem of scarcity. That is a segway into talking about growth as the most efficient way to fight scarcity and poverty because if the institutions are chosen wisely, then there will be growth. If the institutions are not chosen wisely, then there will be blood. Literally.

Questions: Why are some countries rich and others poor? Why have some countries experienced economic growth and others have not? (What factors lead to economic growth?) What can be done to promote economic growth and reduce poverty?

GDP = Gross Domestic Product There are lists of countries of the world sorted by their gross domestic product (GDP) (the value of all final goods and services produced within a nation in a given year). The GDP dollar estimates given on this page are derived from purchasing power parity (PPP) calculations. The ten largest economies in the world and the European Union in 2008, measured in GDP PPP (millions of USD), according to the International Monetary Fund. Using a PPP basis is arguably more useful when comparing generalized differences in living standards on the whole between nations because PPP takes into account the relative cost of living and the inflation rates of the countries, rather than using just exchange rates which may distort the real differences in income.

Low, Middle, & High Income Nations Economic reasoning tools developed this week will help us to answer this and other questions about world poverty Why are some countries rich and others poor? 15

Economic Growth Economic growth raises standards of living, even in the continuing face of scarcity Per capita means the average per person

Population Growth and Important World Events Note that 1750 is beginning of industrial revolution and productivity takes off. ~1750

Notice the same hockey stick in per capita GDP as we saw in world population: this graph really shows that things have changed quite a bit even for the average Joe Schmoe on the street: you cannot get a 37-fold increase without the poor sharing in it in some way or other. Moreover, this makes a mockery of the argument that all Western growth is just exploitation of the Southern hemisphere. Clearly, you can only extract wealth that has already been created and if the average world citizen in 1600 had 150 dollars and there were not even a billion of them, then surely there is no way to get to $6500 per person with 6+ billion just by looting. The numbers would not add up.

Economic Growth improves the lives of the poor by making the pie bigger Bigger “slices” mean higher standards of living

Economic Freedom ranking: The poverty of some nations and the wealth of others is not an accident; it is the result of choices Economic Freedom ranking: 148 / 157

Who was that guy? Venezuela’s government is increasingly interventionist, and overall economic freedom is severely limited by government regulations and controls. The state oil company, PDVSA, runs the petroleum sector. Government companies control electricity and important parts of the telecommunications and media sectors. Monetary stability is weak, and there are price controls on almost all goods and services. Corruption is rampant under an inefficient judicial system that is vulnerable to political influence.

The rule of law has been severely undermined by the government of Hugo Chávez. Contracts and property rights are poorly protected, and government expropriations have been on the rise. The government has nationalized cement and steel producers, some companies in milk and meat distribution, one of the country’s largest private banks, numerous companies in oilfield services, and a processed rice plant owned by a U.S. company. These nationalizations and Venezuela’s repressive entrepreneurial environment have sharply curtailed private investment.

Heading a government that has abandoned all but the trappings of democracy, President Hugo Chávez has positioned himself as the leader of Latin America’s anti–free market forces and sought allies in China and Russia, as well as Iran and other rogue states. He has hobbled opponents, undermined speech and property rights, pursued a military buildup, and imposed foreign exchange controls. In 2009, education “reform” targeted religious educators and parochial school funding and reduced the autonomy of university administrations; a referendum removed term limits from the constitution. Venezuela has Latin America’s highest inflation rates.

What do you think it is like to live there? The overall freedom to start, operate, and close a business is seriously restricted under Venezuela’s regulatory environment. Starting a business takes 141 days, compared to the world average of 35 days. Obtaining a business license takes more than the world average of 218 days.

The Secret to Economic Growth: Productivity The output produced from a given set of resources in a given period of time. Increasing productivity means that greater output is produced from a given set of resources in a given period of time.

Key to Productivity: Institutions the formal and informal “rules of the game” that shape incentives and outline expected and acceptable forms of behavior in social interaction. Institutions in your life:

Discussion With a partner discuss what you think about the next slide. Be prepared to be called on randomly to share with the group.

What are the “rules of the game” (the accepted and expected forms of social interaction) in: Dating ?

Institutions Matter: Property rights The rule of law Open markets Entrepreneurship and innovation

Institutions Shape Incentives The reward or penalties that influence people’s choices and behavior.

Economic Reasoning Principle #2: Choices impose costs; people receive benefits and incur costs when they make decisions. The cost of a choice is the value of the next-best alternative foregone, measurable in time or money or some alternative activity given up.

Opportunity Cost The value of the next best or forgone alternative.

Marginal Cost = cost of next Action, Choice, Unit of production Marginal Benefit = benefit of the next Action, Choice, Unit of production

Choices are made at the Margin Our only choice is the next choice Marginal = additional, next, a little more or a little less

The “Big Ideas” from Lesson 2: Scarcity forces us to choose among alternatives Economic growth gives us more to choose from and raises standards of living by: reducing infant mortality, Increasing life expectancy, reducing hunger, improving environmental quality, and reducing the incidence of debilitating diseases.

The “Big Ideas” from Lesson 2: Some institutions and institutional arrangements encourage economic growth and some do not. The institutions that foster growth and economic development include: Open markets Property rights and the rule of law Entrepreneurship and innovation