ࡱ> kmj5@ R7bjbj22,HXXE/S&&&&&&&&b8b8b888 84&zS488(999999GGGG%#HlMlR$URXS&=99==S&&994S>>>=&9&9G>=G>>G?PF0&&G98 \\֔b8=FG$GJS0zSG$X1>LXHG&&&&&&X&G 9:>;<999SS&&b8}>&&b8CHAPTER TWO The Economizing Problem LECTURE NOTES The foundation of economics is the economizing problem: societys material wants are unlimited while resources are limited or scarce. A. Unlimited wants (the first fundamental fact): 1. Economic wants are desires of people to use goods and services that provide utility, which, as introduced in chapter 1, means pleasure, happiness, or satisfaction. 2. Products are sometimes classified as luxuries or necessities, but the division is subjective. 3. Services satisfy wants as well as goods. 4. Businesses and governments also have wants. 5. Over time, wants change and multiply. B. Scarce resources (the second fundamental fact): 1. Economic resources are limited relative to wants. 2. Economic resources are sometimes called factors of production and include four categories: a. Land or natural resources, b. Capital or investment goods which are all manufactured aids to production like tools, equipment, factories, transportation, etc., c. Labor or human resources, which include physical and mental abilities used in production, d. Entrepreneurial ability, a special kind of human resource that provides four important functions: i. Combines resources needed for production ii. Makes basic business policy decisions iii. Is an innovator for new products, production techniques, organizational forms iv. Bears the risk of time, effort, and funds 3. Resource payments correspond to resource categories a. Rent and interest to suppliers of property resources b. Wages and salaries to labor resources c. Profits to entrepreneurs 4. Quantities of resources are limited relative to the total amount of goods and services desired. Economics: Employment and Efficiency A. Basic definition: economics is the social science concerned with the problem of using scarce resources to attain the greatest fulfillment of societys unlimited wants. B. Economics is a science of efficiency in the use of scarce resources. Efficiency requires full employment of available resources and full production. 1. Full employment means all available resources should be employed. 2. Full production means that employed resources are providing maximum satisfaction of our economic wants. Underemployment occurs if this is not so. C. Full production implies two kinds of efficiency: 1. Allocative efficiency means that resources are used for producing the combination of goods and services most wanted by societyfor example, producing compact discs instead of long-playing records with productive resources or computers with word processors rather than manual typewriters. 2. Productive efficiency means that least costly production techniques are used to produce any particular mix of goods and services. 3. Allocative efficiency requires that there be productive efficiency. Productive efficiency can occur without allocative efficiency. Goods can be produced in the least costly method without being the most wanted by society. D. Full production means producing the right goods (allocative efficiency) in the right way (productive efficiency). (Key Question 5) Production possibilities tables and curves are a device to illustrate and clarify the economizing problem. A. Assumptions: 1. Economy is operating efficiently (full employment and full production). 2. Available supply of resources is fixed in quantity and quality at this point in time. 3. Technology is constant during analysis. 4. Economy produces only two types of products. B. Choices will be necessary because resources and technology are fixed. A production possibilities table illustrates some of the possible choices (see Table 2-1). C. A production possibilities curve is a graphical representation of choices. 1. Points on the curve represent maximum possible combinations of robots and pizza given resources and technology. 2. Points inside the curve represent underemployment or unemployment. 3. Points outside the curve are unattainable at present. D. Optimal or best product-mix: 1. It will be some point on the curve. 2. The exact point depends on society; this is a normative decision. E. Law of increasing opportunity costs: 1. The amount of other products that must be foregone to obtain more of any given product is called the opportunity cost. 2. Opportunity costs are measured in real terms rather than money (market prices are not part of the production possibilities model). 3. The more of a product produced the greater is its (marginal) opportunity cost. 4. The slope of the production possibilities curve becomes steeper, demonstrating increasing opportunity cost. This makes the curve appear bowed out, concave from the origin. 5. Economic Rationale: a. Economic resources are not completely adaptable to alternative uses. b. To get increasing amounts of pizza, resources that are not particularly well suited for that purpose must be used. Workers that are accustomed to producing robots on an assembly line may not do well as kitchen help. F. Allocative efficiency revisited: 1. How does society decide its optimal point on the production possibilities curve? 2. Recall that society receives marginal benefits from each additional product consumed, and as long as this marginal benefit is more than the additional cost of the product, it is advantageous to have the additional product. 3. Conversely, if the additional (marginal) cost of obtaining an additional product is more than the additional benefit received, then it is not worth it to society to produce the extra unit. 4. Figure 22 reminds us that marginal costs rise as more of a product is produced. 5. Marginal benefits decline as society consumes more and more pizzas. In Figure 22 we can see that the optimal amount of pizza is 200,000 units, where marginal benefit just covers marginal cost. a. Beyond that, the added benefits would be less than the added cost. b. At less than 200,000, the added benefits will exceed the added costs, so it makes sense to produce more. 6. Generalization: the optimal production of any item is where its marginal benefit is equal to its marginal cost. In our example, for robots this must occur at 7,000 robots. IV. Unemployment, Growth, and the Future A. Unemployment and productive inefficiency occur when the economy is producing less than full production or inside the curve (point U in Figure 2-3). B. In a growing economy, the production possibilities curve shifts outward 1. when resource supplies expand in quantity or quality. 2. when technological advances are occurring. C. Present choices and future possibilities: Using resources to produce consumer goods and services represents a choice for present over future consumption. Using resources to invest in technological advances, education, and capital goods represents a choice for future over present goods. The decision as to how to allocate resources in the present will create more or less economic growth in the future. (Key Questions 10 and 11) (See for example Global Perspective 2-1 where various countries are compared with respect to their economic growth rates relative to the share of GDP devoted to investment.) D. A Qualification: International Trade 1. A nation can avoid the output limits of its domestic Production Possibilities through international specialization and trade. 2. Specialization and trade have the same effect as having more and better resources of improved technology. E. Examples and Applications 1. Unemployment and Productive Inefficiency a. Depression b. Discrimination in the labor market. 2. Tradeoffs and Opportunity Costs a. Logging and mining versus wilderness. b. Allocation of tax resources. c. Concept Illustration Opportunity Cost 3. Consider This A Matter of Degrees: Is College Worth the Cost? a. The college decision requires weighing future benefits, including projected lifetime earnings, against present costs, including direct costs (tuition) and indirect costs (forgone wages). b. Despite the success of celebrities such as Bill Gates, Oprah Winfrey, and Kobe Bryant, in general those attending and completing college will earn greater lifetime earnings (about 50% more) than those holding only high school diplomas. 4. Shifts of Production Possibilities Curve a. Increases in the quality and quantity of female participation in the labor force. b. Technological advances in the U.S. F. See the Last Word on how the September 11, 2001, terrorist attacks and subsequent war on terrorism shifted the production possibilities curve and has caused movement along the curve as resources have been reallocated. V. Economic systems differ in two important ways: Who owns the factors of production and the method used to coordinate economic activity. A. The market system: 1. There is private ownership of resources. 2. Markets and prices coordinate and direct economic activity. 3. Each participant acts in his or her own self-interest. 4. In pure capitalism the government plays a very limited role. 5. In the U.S. version of capitalism, the government plays a substantial role. B. Command economy, socialism or communism: 1. There is public (state) ownership of resources. 2. Economic activity is coordinated by central planning. The Circular Flow Model for a Market-Oriented System (Key Graph 2-6) A. There are two groups of decision makers in the private economy (no government yet): households and businesses. 1. The market system coordinates these decisions. 2. What happens in the resource markets? a. Households sell resources directly or indirectly (through ownership of corporations). b. Businesses buy resources in order to produce goods and services. c. Interaction of these sellers and buyers determines the price of each resource, which in turn provides income for the owner of that resource. d. Flow of payments from businesses for the resources constitutes business costs and resource owners incomes. 3. What happens in the product markets? a. Households are on the buying side of these markets, purchasing goods and services. b. Businesses are on the selling side of these markets, offering products for sale. c. Interaction of these buyers and sellers determines the price of each product. d. Flow of consumer expenditures constitutes sales receipts for businesses. 4. Circular flow model illustrates this complex web of decision-making and economic activity that give rise to the real and money flows. B. Limitations of the model: 1. Does not depict transactions between households and between businesses. 2. Ignores government and the rest of the world in the decision-making process. 3. Does not explain how prices of products and resources are actually determined, but this is explained in Chapter 3. VII. LAST WORD: September 11, 2001, and the War on Terrorism A. The destruction of life and buildings on September 11, 2001, had the effect of shifting the production possibilities curve inward, albeit slightly, given the total productive capacity of the United States. The loss of capital was similar to a major natural disaster. The loss of lives (nearly 3,000) will reduce future output by an estimated $3-4 billion. B. The war on terrorism can be represented by a movement along the production possibilities curve, as resources are reallocated from civilian goods to defense goods. The decision of how much to reallocate should be made by weighing the marginal benefits against the marginal costs of more defense goods. C. The U.S. economy was not fully employed in 2001 and 2002, implying that the production of more defense goods may not have come at the expense of civilian goods. In terms of the production possibilities curve, this would mean that the economy moved from a point inside the curve to a point closer to the curve, ceteris paribus. D. The war on terrorism will produce new technological innovations. It is unclear whether those will have beneficial private sector applications (GPS), or whether research and development in this area will divert resources from potentially more productive private sector R&D. The Economizing Problem The Economizing Problem PAGE 24  PAGE 23 16 2 7 !&"&(&g&&&'')K*-,r,2A2E7]7^7v7w7x7~7777777777777hW0JomHnHu h%s10Jojh%s10JoU h%s16] h%s15\ h%s15h%s1) $2  M v < Z < J x h$ X8a$g$a$f$a$e$a$d$ & F a$7E77,a>+=h=D} 1e$a$d$ & F a$f$a$g$a$135Ms] 7 !R!!4## $ d$^`a$g$a$ f$0^`0a$e$a$f$a$ $$$%F%W%%%%%"&#&h&3'/(]((()K*a***+F+++d e$^`a$e$a$f$a$++-,r,,-@---m../Z///K000<112A234.6C7 d$^`a$g$a$e$a$ d$ & F 8a$f$a$C7E7]7^7v7w77777777777$a$&#$ hh]h`h&`#$%$a$%e$^`a$gdW*0&PP<0/ =!"#$%s<@< gQeCJOJQJ_HmH sH tH X@rX jL 1$xx@&&5>*CJKHOJQJ_HmH sH tH Z@rZ jL 2$<x@& h@5CJOJQJ_HmH sH tH :@: jL 3$<x@&OJQJ8@8 jL 4$@@&`@5\$A@$ -k=W[WFi@F hT @. ^@`CJOJQJ_HmH sH tH 6@ v&{_ 2x & F<x>Th^`CJOJQJ_HmH sH tH :@ nU_x 2x & F<x>Th.^`OJQJ_HmH sH tH HD@H c~h<x^hOJQJ_HmH sH tH J @J >\$ !a$OJQJ_HmH sH tH @O@ Equation2a H@@ ^@ dOd Question" h@h<x^h`OJQJ_HmH sH tH VOV Answer!$hx^ha$KHOJQJ_HmH sH tH `O"` Bibliography Entry "$xOJQJ_HmH sH tH @O2@ Misc#$OJQJ_HmH sH tH jOBj Table,Financial$$  @`@@@@@OJQJ_HmH sH tH PORP Table Body%$CJOJQJ_HmH sH tH nObn Newspaper body&$x]^a$CJOJQJ_HmH sH tH tOrt Newspaper header'$ @`^``CJOJQJ_HmH sH tH pOp Newspaper copyright($$xxa$CJOJQJ_HmH sH tH OR Table Exhibit Title#)$ @hx&d ^h5CJOJQJ_HmH sH tH O Graphic Exhibit Title Line*$x&d OJQJ_HmH sH tH lOl Suggested Readings+$ ^ `OJQJ_HmH sH tH LOqL Newspaper body 2,h`hCJTOT title page title-$a$ 5;CJ(JOJ title page t/a .$Xa$6CJfOf title page book title/$$d &d a$ 5;CJ4NON title page edition 0$ha$CJVO"V title page author name1$a$5CJ$LOrL title page school2$a$6CJXOBX cen arial caps 14 3$a$;CJOJQJHOH body text arial 114OJQJfOqRf Footer (first page only)5$a$ CJOJQJbObb T-acct sm entry line6 Tj CJOJQJTOT chapter number 7$$a$5;CJ OJQJJO1rJ cen arial underline8>*nOn Even page header9 +$^5;OJQJ_HmH sH tH JOJ Odd page header: ^00 ;seW[; CJOJQJ$&$ ;sSgqH*O Quote (right/left indent)=$x]^a$6OJQJ_HmH sH tH NOrN Caps bold head>x`5::O: List bullet 1?VOQRV table heads!@   h^h6hOh boxed body text0A$xx$d%d&d'd^a$bO"b box head*B<$d%d&d'd`5:OJQJPO2P box source line C$<a$ CJOJQJbOQrb table body final'D @ HPh&d ^hVOV table heads center E$<a$ 5OJQJ`OA` table span headF  @`5CJOJQJfOrf T-acct sm final lineG Tj>*CJOJQJTOT T-acct sm head H >*CJOJQJ`O` T-acct sm note lineI *@ 5CJOJQJfOf T-acct sm total lineJ Tj>*CJOJQJfOf t-acct lg debit"K *]^*` CJOJQJvOv t-acct lg credit side%L v}*]}^*` CJOJQJ`O` t-acct lg headM$}&d]}^a$ CJOJQJLOAL table footnoteN$  CJVOV table source lineO` CJOJQJBOrB Italics headingPx6Oq list questiontQ & F8>T8h. ^8`Oqr list ques finalpR & F8>T8h. ^8`dO2d quote source line#S$ r*^*`a$CJPORP GJ Name LineT$ <&d] a$CJhObh GJ Head Line10U  n  r4^ i$d]iCJhOrh GJ Head Line20V  n  r4^ i&d]iCJlOrl GJ Entry line3W n  r4^ i&d]iCJhOh GJ Entry line1-X n  r4^ i]iCJ>O> GJ Entry line2Y$dBOB List Number finalZO List Number 2finale[>T @. `8O8 Obj2\`dd1$^`O L#3l]$<<>T h)^CJ\Oq\ Margin Box&^$&#$+D5 .h/ha$5CJ8OQ8 Table Body 9_CJNON Obj1`$ 0*$^a$@KHOJQJO L#4ia>Th)^`FO"F Body Text Outline b^^Oq2^ Margin Text&c$&#$+D5 .h/ha$5CJOB Outline 1:d 8p @ 0<<@&^`0CJOJQJ_HmH sH tH BOARB Outline 2e8@&^8`BOAbB Outline 3f@&^`VOArV Outline 4)g p @ @&^`^OA^ Outline 52h X8 @ p*$@&^p`BOAB Outline 6i @&^ `DOD Outline Indentj<^6C@6 ,ge.~ck$hx^ha$POP title page prepared by l;@ nU_x 3tm & F8<>Th.^8`6O6 AnswerSpacen)@ x*U@* #P} >*B*ph0Y0 eN_\q-D OJQJB^@"B gQe (Web)rdd[$\$CJaJ/H $2Mv<Z<Jx,a> +  = h =D} 135Ms]7R4 FW"#h3/ ] !K"a"""#F####-$r$$%@%%%m&&'Z'''K(((<))*A*+,..C/E/]/^/v/w//////////7000 d0e02(f0(f0(f0(f0(f0e02(f0v(f0v8g08g08g08g0Hh0<Hh0<Hh0<Hh0<(f0v8g0x8g0x8g0x(f0v d0e0e0(f0a(f0ae0(f0(f0(f0e0 d0e0 (f0 (f0 (f0 (f0 e0 e0 (f0=(f0=(f0=e0 (f0}(f0}e0 (f0 (f0 (f0 (f0 e0 (f05(f05e0 (f0s(f0s(f0s(f0s(f0s8g08g0(f0sd0e0e0(f0(f0e0e0e0(f0(f0e0e0e0e0e0e0e0e0e0e0e0e0e0e0e0e0d0e0!(f0K"(f0K"(f0K"(f0K"(f0K"e0!(f0#(f0# d0e0-$(f0r$(f0r$8g0%8g0%8g0%8g0%(f0r$8g0&8g0&8g0&8g0&(f0r$e0-$(f0((f0((f0(d0e0*e0*e0*e0*d0@%0My00e@%0My00e@0@0My00e@0@0My00My00My000$e 2@NNRU71 $+C77 !"#729<AHKU!!8  @ 0(  B S  ?/!"|#4$%&'()\*+P,\-.\/$0< !P#P#*m*++,,/      !T#T#&**++,,/ 8 *urn:schemas-microsoft-com:office:smarttagsdateB *urn:schemas-microsoft-com:office:smarttagscountry-region9*urn:schemas-microsoft-com:office:smarttagsplace8 *urn:schemas-microsoft-com:office:smarttagsCity 1120019DayMonthYear      E///DI UYE///3333$2,E/\/^/u/////E///EconEconEconEconEconEcon karen_minnichMHEMcGraw-Hill Educationjoe80g~ʝ4̇R\x._ REe , /,~9"6 au7FИT)I7PZxB&9cf(<[es*px,~95x,~988^8`.^`. ^`OJQJo(hh^h`.88^8`o(()0^`0o(.88^8`.L^`L.  ^ `.  ^ `.xLx^x`L.HH^H`.^`.L^`L.B@@^@`. 08^`0. 0^`0o(.0^`0o(.0^`0o(.0^`0o(.08^`0. B@@^@`. B@@^@`. ~ /px5x"6Z<[eT)Iau7&9c._Ee %s1WD//@Canon S300Ne01:winspoolCanon S300Canon S300A4BJDM4__Rt,T`Op,T`OpRt,T`Op,T`OpXX!I?z#j,g 1 d Rt RtH v Canon S300߁ 4dA4&@Canon S300A4BJDM4__Rt,T`Op,T`OpRt,T`Op,T`OpXX!I?z#j,g 1 d Rt RtH v Canon S300߁ 4dA4&@D/D/L%HHD/D//`@Unknown Gz Times New Roman5Symbol3& z ArialC.e0}fԚPMingLiUY New YorkTimes New Roman3z Times;" Helvetica9CG Times5& zaTahoma#@=F=F^*xF7(U7(U!;2d-/-/F3Q;H(?W*D:\Microsoft Office\Templates\Irwin37b.dotCHAPTER OVERVIEWRoderick Richardsjoe80gH          Oh+'0  4 @ L Xdlt|CHAPTER OVERVIEWdHAPRoderick Richardsdode Irwin37bRicjoe80gb2e8Microsoft Word 10.0@F#@ Z@N@֔@N@֔7(՜.+,D՜.+, X`lt|  eU-/A D@ 8_AdHocReviewCycleID_EmailSubject _AuthorEmail_AuthorEmailDisplayName_ReviewingToolsShownOnceZyMcBrue 16 IM Filesnkaren_minnich@mcgraw-hill.comnMinnich, Karencinn  !"#$&'()*+,./0123456789:;<=>?@ABCDEFGHIJKLMNOPQRSTUVWXY[\]^_`acdefghilRoot Entry FXf\֔nData %1Table-YWordDocument,HSummaryInformation(ZDocumentSummaryInformation8bCompObjf  FMicrosoft Word MSWordDocWord.Document.89q