C HAPTER 2-PPC,G AINS FROM T RADE,3 ECONOMIES, ET. AL

E CONOMIC W ANTS ( ANYTHING THAT CAN BE PURCHASED IN THE SYSTEM.) There is a difference between WANT and NEED: Break Economic Wants down – Basic (bread a need is basic, shoes at Nordstrom's is want) Social (pretty-much want) BASIC: (Food, Clothing, Shelter) SOCIAL: Microwaves, Refrigerator, High Speed Internet, Air Conditioning, Ipads,

S OCIAL E XAMPLES U.S. H OUSEHOLDS 90% have microwave ovens 88% have television in living room 87% subscribe to cable or satellite TV 77% own personal computer 72% have flat screen TV 68% have broadband Internet service 68% have television in their bedrooms. 90% own computerized gadget

F ACTORS OF P RODUCTION Land, Labor, Capital Entrepreneurship, Every economy works with these factors. Some have more resources, more capital, or more land, etc. Some economies do not encourage entrepreneurship.

PROPERTY RESOURCES LAND ECONOMIC RESOURCES Land- all the bounties of nature- land, minerals, water. What gives land value?

L ABOR Human Resources Quality vs Quantity Watch for capital intensive and Labor Intensive Human’s ability to produce goods and services. Equal opportunity for all--- everyone gets an education.

C APITAL

I N THE FACTORS OF PRODUCTION C APITAL IS MACHINERY, TOOLS USED TO MAKE OTHER TOOLS, BUT THERE ARE OTHER TYPES OF CAPITAL **************physical (good used to produce another good… machinery- tools to produce tractors, computers, roofing machines….*this is why U.S. has a high standard of living (technology, industrial development). Level of consumption depends on R & D to come up with new resources when ones used are getting near depletion. financial- money as such produces nothing. Money only considered as medium of exchange.. Has to be put to use in investment to see growth. human- our mind….can put under physical also because this is a tool…. (for some people)

W HAT IS AN ENTREPRENEUR ? French term “one who begins.” Person who takes the 3 factors.. Puts them together…. (success and failure) Example- Robert Fulton/steamboat… went bankrupt 3 times before he convinced people that a boat could be powered by steam.

T HINKING H AT T IME Name some Entrepreneurs today?

E CONOMIC M ODELS Economic model gives incites as to how something works… only a model… cannot be totally accurate. Production Possibility Curve= model Assumptions: maximum amount of any two goods that can be produced from a fixed amount of resources. specific time period fixed resources and fixed technology PRODUCTIVE EFFICENCY AND FULL EMPLOYMENT

PPC ILLUSTRATES 4 CONCEPTS 1. Scarcity 2. Choice 3. Opportunity Cost 4. Law of Increasing cost THE WAY EACH COUNTRY ANSWERS THESE 3 QUESTIONS… INDICATES THE TYPE OF ECONOMY THEY HAVE

P RODUCTION P OSSIBILITIES C URVE PPC A B C D E F OUTPUT OF SHOES OUTPUT OF TELEVISIONS

N OTE D IFFERENCE IN S HAPE OF C URVE Direct Correlation … Two items produced… 1 to 1 ratio. Can Relinquish one part of resources and not have to give up More of another. No law of increasing cost. Economics English

I NCREASING O PPORTUNITY C OSTS Step 1: give up one shoe Step 2: get two TVs Step 4: get one more TV A B C D E F OUTPUT OF TELEVISIONS

PPF AND O PPORTUNITY C OST

At any point in time, a full-employment, full- production economy must sacrifice some of product X to obtain more of product Y. Do you know why? Limited Resources means a limited output...

P RODUCTION P OSSIBILITY Q Q Pizzas (hundred thousands) A B C D E W Attainable but Inefficient Unattainable

L AW OF I NCREASING O PPORTUNITY C OSTS The amount of other products that must be forgone or sacrificed to obtain 1 unit of a specific product is called the opportunity cost of that good. A graph of the production possibilities curve will be bowed out from the origin. Economic resources are not completely adaptable to other uses. Crude Oil is not adaptable to making bread.

Q Q Robots (thousands) Pizzas (hundred thousands) U Unemployment & Underemployment Shown by Point U More of either or both is possible

E CONOMIC G ROWTH The ability to produce a larger total output - OR a rightward shift of the production possibilities curve caused by... ????????

S HIFT IN THE PPF

R ESEARCH AND D EVELOPMENT R&D 1 – Increase in resource supplies 2 - New Resources 3 – Better resource quality 4 – Technological advances

T IME TO T HINK … PUT YOUR “ THINKING HAT ON.” If we do not utilize our resources…what happens? unemployment lower standard of living Where would we be on our PPC? *******Mental exercise….capital goods vs consumer goods.

B UILD A CONCEPT FOR GROWTH Two things to do with your money? When you save it where do you put it? What does that financial intermediary do with it? Why? What is capital? What does that injection of cash often provide? Is consumption important to an economy? Why Is capital important to an economy? Why Savings Investment Jobs Growth TIME TO PONDER!!!

V ISUALIZING I NVESTMENT Often, we are hesitant to invest in capital goods “today” even if it results in larger consumer good production “tomorrow.” Today’s investment may Take a long time Have a large opportunity cost May have uncertain results

Bottom Line At some point societies (and individuals) have to abstain from consumption in order to have greater ability to consume in the future.. We (consumers) determine what goes into consumption/savings… Resources are limited…. Need to save so that capital can be acquired… (industrial development) But… need to consume also. Especially now.

Is there a balance? (Enter monetary and fiscal policy decisions)… high interest rates (save incentive) pulls money out of economy and places into investments – should lower inflation… But, too much saving lowers goods available and increased demand can drive prices up, production down.

T RADE I NSIGHTS Trade=exchanging one thing for another. Usually goods or services for $$. The economics profession nearly unanimously backs free trade.

F REE T RADE ? G OOD OR D ETRIMENTAL ? So…………. If economists agree that Free Trade is a good thing….. Why all the fuss politically and internally about 1) jobs fleeing the country 2) unfair advantages for subsidies/ 3) what is in-sourcing? 4)What incentive do businesses need to bring their jobs back to U.S. 5) How do you feel about businesses being subsidized by government?

“N O NATION WAS EVERY RUINED BY TRADE.” B ENJAMIN F RANKLIN Terms of Trade = how much of one thing for how much of something else. Transaction costs = costs of time/effort to negotiate or work out deals. Absolute Advantage = Comparison of production costs of two countries. Comparative Advantage = Output is greatest when each product is made by the country with the lowest opportunity cost. What is Exchange? = giving up one thing for another.

C AN US W ORKFORCE FIND JOBS ? ?iid=172&type=educator

D ICK AND J ANE CAN BOTH BUILD BOAT Both can build boats/cars Dick can build more cars in less time than Jane Jane can build more boats than Dick Dick builds cars- Jane builds boats… They trade freely and both are better off. Process = which has lowest opportunity cost… each gains more than initial individual effort.

D ECIDING LOWER OPPORTUNITY COST Elizabeth and Brian Before the Trade Elizabeth production possibilities… best for her 10 bread and 10 apples Brian production possibilities… best for him 5 bread 15 applies. Comparative Advantage says – 2 parties, both produce same thing Look for lowest opportunity cost Elizabeth Opportunity Cost 1B=1A, 1A=1B Brian 1B = 3A, 3A =l/3B Elizabeth and Brian both like bread and apples And live close to each other (given)

T ERMS OF THE TRADE Elizabeth and Brian Before the Trade Elizabeth decides to produce 20 loaves bread – trades 8 to Brian and receives 12 apples. Brian produces 30 apples – trades 12 apples to Elizabeth and receives 8 loaves bread. Terms of Trade: Elizabeth and Brian decide to trade 8 loaves of bread for 12 apples. Elizabeth bakes bread trades 8 to Brian Brian produces apples and trades 12 to Elizabeth

C OMPARATIVE A DVANTAGE B ONUS Remember terms of trade 8 loaves for 12 apples…. Elizabeth now consumes 12 loaves bread and 12 apples Brian consumes 8 loves of bread and 18 apples Clearly both are better off… See first column above! Trade works…. But free trade works great.

A BSOLUTE A DVANTAGE Elizabeth can bake bread better and faster and can produce apples better and faster. Brian is left out in the cold!

P ROGRESS = DIVISION OF LABOR AND SPECIALIZATION. Production Increases Division and Specialization of Labor example: task become repetitious task is continuous (no switching from one task to another) better ways to produce (innovation) workers find easier ways to perform task. Exchange takes place. Thank you Mr. Smith!

T HE INVISIBLE HAND PERMEATES THROUGHOUT OUR ECONOMY. E VEN WHEN WE AREN ’ T LOOKING ! We serve our self interest- invisible hand guides us toward certain actions that will make us better-off. Adam Smith concept…. If we all attempt to improve our situation, society profits. Elizabeth and Brian served their self interest by producing and trading.

3 C OMMON G AINS FOR S OCIETY 1. New Technology 2. New Resources 3. Specialization and Trade

W HAT ABOUT I NTERNATIONAL T RADE ? Outsourcing? Examples being sent over today: customer service, telemarketing, document management, law research, basic labor tasks Insourcing?

QUESTION FOR THE DAY ? What kind of an economy does the U.S. have? What are the 3 basic economies of the world?

W HAT KIND OF AN ECONOMY IS IT ? Capitalism SocialismCommunism

W HAT IS AN ECONOMIC SYSTEM ? Economic system is more than simply a way to make a decision It is a way of life. Differs among societies and reflects a wide variety of values for individuals. One value cannot prove superior to others as a general rule. Values are set in cultures and cultures set by economic system.

W HAT IS C APITALISM ? Accumulation of factors of production Productive labor (work for wages/become productive/produce more/ more accumulation of financial capital and capital) Profits are the motivational factor to production and wages. Private Property is paramount. Does it discourage wealth? Is wealth considered greedy? Why is capitalism so revered as opposed to other systems? Key to capitalism is what?

W HAT IS S OCIALISM ? Degrees of socialism – all of Europe is example Major factors of production owned by government. It has degrees between market and marxism Generally means that factors are owned in common and/or regulated by government Redistribution of wealth is key Private ownership can and does exist. Profit is not an objective, but distributing goods and services to all equally is. Equality of distribution- *** remember utopias and the hippies.

F REEDOMS MEASURED BY ECONOMIES CAPITALISM SOCIALISM Most Reduced Quasi-Balanced Increased Least COMMUNISM Freedom measured by degrees

D EGREES OF S OCIALISM -J UST LIKE DEGREES OF C APITALISM.

MARXISM – MAO T OTALITARIANISM Dictatorship would rule working class-become central planners- making all economic decisions. Through socialism people’s material and spiritual well-being would improve. A true classless society would come into existence. All property would be owned collectively All people would work to the best of their abilities to produce goods and services. People would consume only what they need People would worship the government.

S UMMARY C OMMAND Relatively small amount of personal freedom- very restricted. Lower standard of living for all except political leaders. Only one political party runs government Production and distribution of goods in hands of government Change through revolution (often bloody- Russia, China) Private business can exist- state controlled Master plan of government is key to economic success.If plan fails, economy fails.

REMINDER There are no pure economic systems anyplace in the world. Because we began civilization as clans, tribes, etc…. Traditional was prevelent Moved to Kings, Sovereigns, benevelent and non- benevelent rulers (but…. Combined the political with the economic) Europe had strong mercantilist economy for over 300 years.

So how unusual it was for a new nation to actually want to self-rule and establish a market economy. HOW ON EARTH COULD THE CANDLES BE MADE, THE BREAD BAKED, THE BUSINESSES ESTABLISHED???? Invisible Hand concept – Mr. Adam Smith.

I know of no safe depository of the ultimate powers of society but the people themselves, and if we think them not enlightened enough to exercise their control with a wholesome discretion, the remedy is not to take it from them but to inform their discretion by education. Thomas Jefferson

T WO INSEPARABLE CONCEPTS

T RADE AND G ROWTH ARE G OOD !