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An Exercise in Connecting the Dots

Today, over 1 billion people in the world gohungry while over 1 billion people areoverweight.

How do you explain this?

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Connecting more dots

• How do you explain therelationship between the previousproblem and the 3 features of the

economic way of thinking:

Scarcity and ChoiceRational behaviorMarginal analysis

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TheEconomizing

Problempart 1

!earning "b#ectives$%tudents will thoroughly and co&pletely explain$

The ' basic input (actors o( production,The individual)s econo&i*ing proble&,%ociety)s econo&i*ing proble&.The basic types o( econo&ic syste&s,The circular (low &odel.

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The +oundations o( Econo&ics

SOCIETY HAS VIRTUALLY UNLIMITED WANTS...

The econo&ic wants o(

citi*ens,(ir&s, and govern&ents

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BUT LIMITED OR SCARCE PRODUCTIVE RESOURCES!

SOCIETY HAS VIRTUALLY UNLIMITED WANTS...

The +oundations o( Econo&ics

The &eans o( producinggoods and services

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oods - %ervices rovide...

UTILITY A &easure o( satis(action or pleasure.

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Individuals want luxuries – goods and services

oods - %ervices rovide/

UTILITY

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oods - %ervices rovide...

UTILITY

As well as necessities

The ob#ective o( all econo&ic activity

0s to (ul(ill wants.

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• PROPERTY RESOURCES

LAND - including ecosystem services

%carce esourcesTypes of Economic esources

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Property Resources

- LAND

- !A"ITAL

%carce esourcesEconomic esources

eal Capital$E2uip&ent, tools,

&achinery, buildings 34sed to produce (inalgoods5+inancial Capital $ +undsavailable (or ac2uiringreal capital5

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Property Resources

LAND

!A"ITAL

HUMAN RESOURCES

%carce esourcesEconomic esources

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PROPERTY RESOURCES

LAND

!A"ITALHUMAN RESOURCES

- LA#$ – p%ysical &'ental talents of individuals(

Availa)le and usea)le in t%e

production of goods and services

%CA CE E%"4 CE%E!$N$'I! E*$+ !E*

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ntrepreneurial !bility

• "he ntrepreneur: – "akes the #nitiative in combining resources – Makes Strategic $usiness %ecisions that set

the course of the business – #s an #nnovator – "he Risk $earer & success is not guaranteed

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PROPERTY RESOURCES

LAND

!A"ITAL

HUMAN RESOURCESLA#$

ENT E" ENE+ IAL A#ILIT,

%CA CE E%"4 CE%E!$N$'I! E*$+ !E*

Also knownas the

I put

"ctors o# Pro$uct%o

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esource ay&ents

RENTALINCOME

INTEREST INCOME

WAGESPROFIT &

LOSS

PROPERTY RESOURCESLAND

CAPITAL

HUMAN RESOURCES

LABOR

ENTREPRENEUR

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"he #ndividual's conomi(ing)roblem

Characteristics:• *imited income• +nlimited wants• ! budget line & aka budget constraint• "radeo,s - opportunity costs• Make best choice possible• .hat happens when there is a change in

income/

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$udget *ine 0constraint1 for the#ndividual

6

7'8

91:

:

9'6

;1:19

Doo s=1:

19

1:

;

6

'

9

:9 ' 6 ; 1: 19 1'

=19: >udget

0nco&e @ =19:

P dvd

@ =9:@ 6

0nco&e @ =19:

P b @ =1:@ 19

Attainable

4nattainable

uantity o( aperbac >oo s

A u a n

t i t y o

( D < D s

131B

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Society's conomi(ing)roblem

Introducing the ProductionPossibility Model.

• ! )roduction )ossibilities Model illustratesthe tradeo,s and output that are possiblegiven a limited amount of input2

• #t is important to understand because itcan help display which options mightallow a countr to use their resources in

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ey oint$a e sure you understand this$

To realize the best use of scarce resources,

A society must achieve both

full employment and full production!

What does this mean?

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ey oncep s o emodel• 5ull mployment & the use of all

available resources• 5ull production & all employed

resources are used so they provide the

maximum satisfaction of our economicwants2

• This implies two kinds of

e ciency.• )roductive ciency & )roduction of

any particular mix of goods and

services in the least cost way2

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The roduction ossibilities &odel

!ssumptions

1. +ull E&ploy&ent and +ull roduction

9. +ixed resources in both 2uantity and 2uality

8. +ixed technology

'. Two oods a consu&er good and a capital good

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roduction ossibilities

!ssumes222+ull E&ploy&entand roductiveE((iciency

+ixed esources+ixed TechnologyTwo oods

for example222

. 0 F F A

A Consumer Good

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Two oods

+ixed esources+ixed Technology

!ssumes222+ull E&ploy&entand roductiveE((iciency

roduction ossibilities

for example222

1 o b o t s

A Capital Good

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Us% & "'' o# our resources( to&et so)e )ore p%**"( +e )ust &%,eup so)e )ore ro-ots!

for example

Ghat i( we could only produce ...

.(... o)otsor

/..(... "i00as

roduction ossibilities

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"I11A . 2 3 /% /u $re$ t/ous" $s0

$#$T* .4 5 / .% t/ous" $s0

in table form

roduction ossibilities

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"I11A . 2 3 /% /u $re$ t/ous" $s0

$#$T* .4 5 / .% t/ous" $s0

in table form

graphical form

o ) o

t s

6 t % o u s a n

d s

7

"i00as 6%undred t%ousands7

roduction ossibilities

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"I11A . 2 3 /% /u $re$ t/ous" $s0

$#$T* .4 5 / .% t/ous" $s0

in table form

graphical form

o ) o

t s

6 t % o u s a n

d s

7

"i00as 6%undred t%ousands7

roduction ossibilities

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"I11A . 2 3 /% /u $re$ t/ous" $s0

$#$T* .4 5 / .% t/ous" $s0

in table form

graphical form

o ) o

t s

6 t % o u s a n

d s

7

"i00as 6%undred t%ousands7

roduction ossibilities

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"I11A . 2 3 /% /u $re$ t/ous" $s0

$#$T* .4 5 / .% t/ous" $s0

in table form

graphical form

o ) o

t s

6 t % o u s a n

d s

7

"i00as 6%undred t%ousands7

roduction ossibilities

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"I11A . 2 3 /% /u $re$ t/ous" $s0

$#$T* .4 5 / .% t/ous" $s0

in table form

graphical form

o ) o

t s

6 t % o u s a n

d s

7

"i00as 6%undred t%ousands7

roduction ossibilities

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At " y po% t % t%)e( " #u''1e)p'oy)e t( #u''1 pro$uct%o eco o)y )ust s"cr%#%ce so)e o# pro$uct 2 to o-t"% )ore o# pro$uct Y .

mited Resources meanlimited output222

roduction ossibilities

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8

8

o ) o

t s 6 t % o u s a n

d s

7

"i00as 6%undred t%ousands7

/32

. 4 9 5 : ; / 3 2

2 3 / ; : 5 9

A #

!

D

E

<

Att"% "-'e

-ut I e##%c%e t

U "tt"% "-'e

Att"% "-'e3 E##%c%e t

Note4 E,ery po% t o t/e cur,ereprese ts pro$uct%,ee##%c%e cy

roduction ossibilities

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T/e ")ou t o# ot/er pro$ucts t/"t )ust -e#or&o e or s"cr%#%ce$ to o-t"% 5 u %t o# "

spec%#%c pro$uct %s c"''e$ t/e opportu %tycost o# t/"t &oo$.

T/e L"+ o# I cre"s% & Opportu %ty Costss"ys4 t/"t % or$er to pro$uce )ore o# o e&oo$( )ore o# so)e ot/er &oo$ )ust -es"cr%#%ce$.

L"+ o# I cre"s% & Opportu %ty Costs

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8

8

o ) o

t s 6 t % o u s a n

d s

7

"i00as 6%undred t%ousands7

/32

. 4 9 5 : ; / 3 2

2 3 / ; : 5 9

A #

!

D

E

Att"% "-'e

-ut I e##%c%e t

E6p'"% t/e L"+ o# I cre"s% &Opportu %ty Costs us% & t/ePPC.

roduction ossibilities

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To (ind the point o( allocative e((iciency,you can use arginal analysis, which involves$

Co&paring &arginal bene(its and &arginal costsHere's how to think about marginal analysis:62 !ny economic activity should be expanded

as long as Marginal bene7ts exceed Marginalcosts2

82 "he optimal amount of activity occurs atM$9MC

32 o resources beyond the M$9MC pointshould be allocated to the production of thatgood2 #n fact; you should reduce the use of

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8

8

o ) o

t s 6 t % o u s a n

d s

7

"i00as 6%undred t%ousands7

/32

. 4 9 5 : ; / 3 2

2 3 / ; : 5 9

A #

!

D

E

Att"% "-'e

-ut I e##%c%e t

W/ere o t/e cur,e +%'' t/ePo% t o# A''oc"t%,e E##%c%e cy -e#ou $7

roduction ossibilities

Here)s How to +igure it out5

Two %tep rocess$1. +ind the allocatively e((icient2uantity o( i**as.

9. Then (ind the 2uantity o( obotsthat correspond to that 2uantity o(

i**as.

Note: every point on the PPC consists of pizza – robot pairs!

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"

8 ' a r g i n

a l # e n e f i t

& ! o s

t

8uantity of "i00as

= ;

.

;

2 3

roduction ossibilities

'!

'#

Allocative Efficiency: MB=MC

'#>'!

Two %tep rocess%tep "ne5

1.+ind the allocativelye((icient 2uantity o( i**as.

Iou are loo ing at the > andC associated with the

production o( di((erent2uantities o( pi**as.

The 2uantity o( pi**as where>@ C is the allocativelye((icient 2uantity o( pi**as.

9::,:::5

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8

8

o ) o

t s 6 t % o u s a n

d s

7

"i00as 6%undred t%ousands7

/32

. 4 9 5 : ; / 3 2

2 3 / ; : 5 9

A #

!

D

E

roduction ossibilitiesoint o( Allocative E((iciency

%tep Two5

9. Then (ind the 2uantity o( obots thatcorrespond to that 2uantity o( i**as

J9::,:::K.

At 9::,:::, go up to the C, then go le(t,hori*ontally to the obot axis. The point

on the C where the vertical andhori*ontal lines intersect identi(ies the one

point o( allocative e((iciency.

Allocative e((iciency &eans 9::,:::

pi**as and L::: robots will &axi&i*e thesatis(action o( the society. >ut we &ust be

able to product that co&bo at least cost5

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8

8

o ) o

t s 6 t % o u s a n

d s

7

"i00as 6%undred t%ousands7

/32

. 4 9 5 : ; / 3 2

2 3 / ; : 5 9

U

U e)p'oy)e t 3U $ere)p'oy)e t

S/o+ -y Po% t U Sort o# '%8e to$"y! More o# e%t/er or

-ot/ %s poss%-'e

roduction ossibilities

E i G th

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T%e a)ility to produce a larger total output -a rig%tward s%ift of t%e "roduction "ossi)ilities

curve caused )y???

– Increase in resource supplies

2 – #etter resource @uality

3 – Tec%nological advances

Economic Growth

T%is is a #I DealB

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conomic

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"wo xamples ofconomic

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"wo xamples ofconomic

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!pplications222U e)p'oy)e t " $ Pro$uct%,e % e##%c%e cy

roduction ossibilities

•

The reat Depression o( the 1L8:)s• Mations experiencing signi(icant une&ploy&ent

and unused N under used production capacity.• Econo&ies that allow discri&ination o( any ind

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!pplications222U e)p'oy)e t " $ Pro$uct%,e I e##%c%e cy Tr"$eo##s " $ Opportu %ty Costs

roduction ossibilities

• %hould land be used (or oil production or preserved aswilderness?

• +ar&ing or waste disposal,

• %hould corn be used (or (uel or (ood?

• %hould society devote &ore resources to ho&eland

security or education?

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!pplications222• U e)p'oy)e t " $ Pro$uct%,e I e##%c%e cy

• Tr"$eo##s " $ Opportu %ty Costs•

S/%#ts % t/e Pro$uct%o Poss%-%'%t%es Cur,es

roduction ossibilities

• ore resources increase in nu&ber o( wo&en in thewor (orce.

• >etter 2uality resources wo&en beco&ing bettereducated and pro(essionally trained.

•

Mew technologies.

) ti t ti

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)ractice constructinganswers

• )lease thoroughly and completelyexplain "he )roduction )ossibilityModel

• Step 6 & write down the key points toinclude; in outline format

• Step 8 & add detail to each of the keypoints

• Step 3 & construct your response basedon this outline

>ou should at least have these

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>ou should at least have theseitems%escription of the model

!ssumptions of the model & list and explain= – full production and full employment – 7xed resources – 7xed technology

– two goods & capital and consumer goods4ey concepts & list and explain= – productive e ciency; de7ne; relate to the

curve – allocative e ciency ? de7ne; how to 7nd and

tool to use – conomic