The Budget Line Shows the Various Incomes That an Individual Can Earn From Different Jobs.

MAKING CHOICES

OUTLINE -- Chapter two
The Economizing Trouble: Making Choices

BRIEF OUTLINE: The Necessity of Choice / Making Choices

• Individual'south Economizing Problem: The Budget Line
• Lodge's Economizing Problem: Product Possibilities
• How to Make Choices: Benefit-Price Analysis
• How Countries Brand Economic Choices: Econoimc Systems
• Capitalism and the Five Fundamental Questions
• The Circular Flow Model of Commercialism

I. Individual's Economizing Problem: The Budget Line

• Economizing Problem: the demand to make choices because economic wants exceed economical ways

• The Upkeep Line: A MODEL of an individual's economizing problem:
  • limited income
  • unlimited wants
  • Definition: A budget line is a schedule (table) or curve (graph) that shows the various combinations of two products that a consumer can purchase with a specific coin income
  • Assumptions
    • at that place are only two goods to purchase (DVDs or books)
    • the amount of income to spend is fixed ($120 gift carte at Barnes and Nobles)
    • The appurtenances have prices (DVD'south are $$20 each and books are $10)
  • Calculate the budget line table and draw the upkeep line graph
  • What does the budget line show?
    • Nosotros must make choices
    • Some combinations are unattainable
    • There are tradeoffs - called opportunity costs
      • to become one more DVD y'all take to tradeoff (give up) how many books?
      • the opportunity toll of one book is how much of a DVD?
      • opportunity costs = slope
    • What happens if income or prices change change?
      • income decreases ($60 gift card)
      • income increases ($240 souvenir card)
      • cost of DVD decreases to $10 (income stays at $120)
      • cost of DVD increases $30 (income stays at = $120)
      • price of books decreases to $5
      • price of books increases to $twenty

2. Society's Economizing Trouble: Production Possibilities

A. The Economizing Problem -- The Necessity of Choice

The choices necessitated because order'due south material wants for goods and services are unlimited simply the resource available to satisfy these wants are limited.

1. Unlimited Wants
two. Limited resource

B. Production Possibilities -- Demonstrating the Necessity of Choice

ane. Production Possibilities Tabular array

a. shows the MAXIMUM POSSIBLE LEVELS OF Production given the assumptions
b. assumptions

i) fixed resources
ii) fixed technology
three) productive efficiency
4) total employment
5) just two goods

c. the necessity of choice -- Unattainable combinations

2. Production Possibilities Curve

The Production Possibilities Curve can be use to illustrate several important economical concepts:

• we must make choices
• choices have opportunity costs
• the law of increasing costs
• the consequence of unemployment
• the effect of productive inefficiency
• the effect of economic growth
• how present choices touch future possibilities
• it does NOT show the optimum product mix (allocative efficiency)

a. the necessity of choice -- Unattainable combinations
b. opportunity costs

1) ALL costs in economics are opportunity costs
2) definition

The corporeality of other products which must be forgone or sacrificed to produce a unit of a production.

three) examples

• op. toll of coming to grade today
• op. price of attending NIU
• op. toll of a free trip to Europe
• What is the op. cost of a human being life?

4) calculating opportunity costs

c. law of increasing costs

one) definition

As the product of a good increases the opportunity cost of producing an additional unit rises.

2) shape of the PPC -- concave
3) rationale

d. unemployment
east. productive inefficiency
f. economic growth

1) definition

(a) Our Definition: an increment in the Ability to produce goods and services

(b) Testbook's definitionAn outward shift in the production possibilities bend which results from an increment in resource quantity or quality or an improvement in engineering

(c) Common Definition: economic growth occurs when the economy produces more than

2) causes

• getting more than (additional) resource
• getting better resources
• getting new, better, technology

3) graphically
iv) "ABILITY" vs. how much is actually produced
five) Is a shrinking PPC? possible?
6) What would crusade not-proportional growth

m. nowadays choices, future possibilities
h. optimum product mix? (allocative efficiency?)

The Production Possibilities Curve tin can be utilize to illustrate several of import economic concepts:

• we must make choices
• choices have opportunity costs
• the police force of increasing costs
• the effect of unemployment
• the effect of productive inefficiency
• the effect of economical growth
• how present choices bear upon future possibilities
• it does Non show the optimum product mix (allocative efficiency)
  • nosotros'll use the MB=MC assay to practise this (see effigy ane.3 [p. 13] of your textbook)

C. Real World Applications

one. The economic science of War (p. 14)

• defense good, noncombatant goods and the "war on teror"
• Marginal Do good and Marginal Costs
• nine/11 increase the MB of defence goods

2. discrimination
3. growth: Japan vs. U.S.
4. international trade

III. The Necessity of Pick -- HOW?

• p. v, "Marginal Analysis: Benefits and Costs"
• pp. thirteen-xiv, "Optimal Allocation" (especially fig 1.3),
• p. fourteen "The Economics of War" (box)
• Ch. 8: p. 161 Last Word: Sunk costs are irrelevant in decision making
• Ch. 16: pp. 319-321, "Guild's Optimal Amount of Externality Reduction"
• Ch. 22: p. 435 "Immigration: 2 Views"

A. Do good-Price Analysis
"the economic perspective")

1. definition

the option of ALL possible alternatives where the marginal benefits are greater than the marginal price

select all where: MB > MC
up to where: MB = MC
but never where: MB < MC

TEXTBOOK: Marginal Analysis: the comparing of marginal ("extra" or "additional") benefits and marginal costs, usually for decision making .

2. marginal benefits and marginal costs

• marginal benefit

  The extra (boosted) benefit of consuming one more unit of some practiced or service; the change in full benefit when one more unit is consumed.

• marginal cost

  The extra (additional) cost of producing i more unit of measurement of output; equal to the change in total cost divided past the change in output (and in the short run to the modify in full variable cost divided by the change in output).

three. Marginal Do good = Marginal Toll Dominion

• The point at which the size or scope of production (or any decision) is optimized.
• The activity, scope, or output of a project (or decision) should exist increased until information technology reaches this point - or comes very close to it.
• This point will yield the maximum net benefit to society.
• If marginal benefit exceeds marginal cost, then the projection is too pocket-size, and could be increased thereby increasing the net benefit to society;
• all the same, if the marginal toll exceeds the marginal benefit, then the project volition subtract the internet benefit to lodge and should exist decreased in scope.
• For example, if the price of a proposed government program exceeds its benefits, so it would be unwise to undertake it, but if the benefits exceed the cost, then information technology would be uneconomical, or "wasteful" not to spend on that government program.

iv. ignore fixed or sunk costs

any price that does not change every bit a upshot of the conclusion

TEXTBOOK: A fixed cost is whatever cost which in total does not change when the firm changes its output; the cost of fixed resources.

v. Changes in MC and MB

• if MC INCREASE then people will practice LESS
• if MC DECREASE so people will do More

• in MB INCREASE people will do More than
• if MB Subtract people will practice LESS

6. examples

a. How many guards should exist hired?
b. How many bridges should be built?
c. Should I go to form today?
d. should I nourish NIU total time?
e. Should I drive fast?
f. The economics of State of war (p. 13)

• defense good, noncombatant appurtenances and the "war on teror"
• Marginal Do good and Marginal Costs
• nine/11 increase the MB of defense appurtenances

grand. Immigration: Ii Views (p. 435)

h. "Sunk costs are irrelevant in decision making" (p. 161)

• purchase tickets to football game game but wake up with the flu - should you go?
• you buy "totally mushy" apples
• already paid a nonrefundable almanac lease for a business - should you move to a more profitable location
• $one million spent on R&D for a new product that few people desire - should you produce it anyway fifty-fifty at a loss?
  • New Coke
  • McLean

i. Others

Call back of a conclusion that you currently take to make. What are the marginal benefits and the marginal costs? Are there any sunk costs that do non matter?

5. GRAPHICALLY [mcmb.jpg]

B. Microeconomic Applications

i. optimal quantity of a good: MSB = MSC

ii. utility maximizing dominion: MUa/Pa = MU b/Pb (Ch. seven)

3. profit maximization: MR = MC (Ch. 9, 10, 11,)

four. rule for employing resources: MRP = MRC (Ch. 13, 14)

C. REVIEW: Multiple Selection Problems

IV. How Countries Make Economical Choices: Pure Commercialism and the Market System (The Market and the 5 Es)

A. Introduction

• Economic Systems (pp. 33-34)
  • A item set of institutional arrangements and a coordinating mechanism for solving the economizing problem;
  • A method of organizing an economy
• Two main types:
  • Command Economy or socialism
  • Market Economy or Capitalism
  • Economic systems are ways that countries answer the v fundamental questions (p. 34-36):

    1. What volition be produced?
    2. How will appurtenances and services exist produced?
    3. Who will go the output?
    4. How will the system accommodate change?
    5. How volition the system promote progress?

  • Economical Systems:
    • At that place are no PURE control economies
    • There are no PURE market economies
    • Instead at that place is a continuum of different characteristics

      

    • All over the world countries are changing their economies from command economies to market economies
  • Economical Systems: Characteristics
    • who owns
    • who decides
      
  • Types of Economical Systems
    • Pure Capitalism
      • also called:
        • marketplace economy
        • competition
        • costless enterprise
        • laissez-faire capitalism
    • Control Economic system
      • also chosen
        • socialism
        • state-run economy
        • centrally planned economy
        • communism
      • Examples:
        • North korea
        • Republic of cuba,
        • Turkmenistan
        • Myanmar
        • Belarus
        • Laos
        • Libya
        • Iran
        • Republic of iraq (until 2003)
  

  • All economic systems are Mixed Systems
    

TYPE OF SYSTEM	WHO OWNS?	WHO DECIDES?
Pure Commercialism:	individual ownership	the market system
Control Economic system:	authorities ownership	centralized (or gov't) decision-making
Mixed Economy	some private and some government	some private and some regime

• The Demise of the Comand Systems
  • The Coordination Problem
  • The Incentive Problem
• Paul Solman Video: Capitalism vs. Socialism - The Cuban Quandary
  • notation the important role of INCENTIVES

B. Capitalist Ideology

• Basic Characteristics:

  Grade:	TEXTBOOK:
  ane. private holding 2. freedom of enterprise and choice 3. role of self interest 4. competition 5. markets and prices 6. express role for authorities	1. private property 2. liberty of enterprise and choice 3. part of cocky involvement 4. competition 5. markets and prices six. technology and capital goods 7. specialization 8. use of money active, only limited government

1. individual property

• provides an incentive for economic growth
• Paul Solman Video: Private Holding (and Pilgrims too)

  OPTIONAL: http://www.npr.org/templates/story/story.php?storyId=1565953

  China Considers Private Property Rights on National Public Radio

  All Things Considered, December 22, 2003 · In Beijing, legislators propose an amendment to the Chinese constitution guaranteeing private property rights. The motion has great symbolic importance in a country that is nominally communist, but whose people have been buying property and trading stocks for years every bit the issue of economical reforms by Deng Xiaoping. NPR'south Rob Gifford reports.

2. markets and prices

• prices GUIDE resources
  [pickups driving to Florida with plywood]
  • dollar votes
• prices RATION appurtenances and services
  [high prices later on a hurricane encourage people to conserve]
• markets and prices bear upon allocative efficiency

  Quick Quiz:

  TO Determine HOW TO USE ITS LIMITED Resources TO SATISFY HUMAN WANTS PURE CAPITALISM RELIES ON:

  A. CENTRAL PLANNING
  B. Free Merchandise
  C. A PRICE Organisation
  D. FULL EMPLOYMENT

3. part of cocky interest

• Introduction: would you rather have government or private business organisation . . . . ? WHY?
  • gas station near a desert

• Cocky interest is a powerful force and IF In that location IS Contest IN AN Economic system it will result in improving the social proficient as if there is some "invisible hand" guiding their decisions.
  • "greed" and productive efficiency
  • "greed" and allocative efficiency
  • "greed" and economic growth

4. freedom of enterprise and choice

• definitions
  • Freedom of enterprise ways that entrepreneurs and businesses have the freedom to obtain and use resource, to produce products of their choice, and to sell these products in the markets of their pick.
  • Freedom of choice means:
    • Owners of property and money resources can use resources as they choose.
    • Workers can choose the training, occupations, and job of their choice.
    • Consumers are free to spend their income in such a mode as to best satisfy their wants (consumer sovereignty).
• provides the means for "greedy" people to assist the economy achieve allocative and productive efficiency and economic growth

5. competition = capitalism=

• what is competition?
  • one. Big numbers of sellers hateful that no unmarried producer or seller tin can control the price or market supply.

    ii. Large number of buyers means that no unmarried consumer or employer can control the price or market demand.

    3. Depending upon market conditions, producers can enter or get out industry hands.

• competition is the "invisible hand"
  • plywood after a hurricane
  • monopolies and inefficiency

half-dozen. limited role for authorities

• What IS the economical part for regime? (chapter v)
• Economic goals: 5 Es
• Problems with capitalism:
  • at times even market place economies attain allocative INefficiency:
    • overproduction (as well much produced) of goods with negative externalities
    • underproduction (too piffling produced) of appurtenances with positive externalities
    • trend for business to increase monopoly power and produce less to increase profits
  • macroeconomic instability (periods of loftier unemployment and periods of high inflation)
  • no mechanism to guarantee equity

C. The Marketplace System at Work

ane. The Market and the 5Es

a. Economic Growth

(1) Define
(2) Economic Growth and the characteristics of Capitalism

(a) private property
(s) self involvement
(c) freedom of enterprise and choice

(iii) market economies tend to have faster growth rates than practice control economies

b. Allocative Efficiency: Producing what consumers want

(1) The role of self interest in capitalism provides INCENTIVES to be allocatively efficient.

• more profits = produce more than
• losses = produce less

(2) Capitalism'southward utilise of the market (supply and need - Ch. 3) provides a MEANS to achieve allocative efficiency

• consumer sovereignty and "dollar votes"

(three) Capitalism tends to achieves allocative efficiency

c. Productive Efficiency: Producing at a minimum cost

(1) The role of self interest in capitalism provides INCENTIVES to exist productively efficient.

(a) profits = total revenues - total cost
(b) minimizing costs means more profits
(c) minimizing costs is productive efficiency

(2) Capitalism tends to achieve productive efficiency

d. Equity

• Commercialism does not have a mechanism to assure EQUITY. This may exist a office of regime (ch. 5)

due east. Full Employment

• Economists disagree over whether capitalism will guarantee Full EMPLOYMENT.
• studied in macroeconomics

two. Summary:

a. The move toward capitalism has resulted in high rates of Economical GROWTH in many countries. Profits, private property, and liberty of enterprise and pick promote growth

b. The cost machinery (supply and need) and the role of self interest provides for an ALLOCATIVELY EFFICIENT use of resources

c. Commercialism provides the incentives (turn a profit) for a PRODUCTIVELY EFFICIENT apply of resources

d. Capitalism does not accept a mechanism to assure EQUITY. This may exist a role of regime

e. Economists disagree over whether capitalism volition guarantee Total EMPLOYMENT.

• Some say aye, and if at that place is unemployment it is usually caused by regime interference
  
• Some say no, and at times authorities involvement is needed to move the economic system towards full employment

---

Pure Capitalism and the Market place Organisation:
The Marketplace and the v Es

Characteristics of a Market place Economic system (Commercialism)

A. private property
B. markets and prices
C. role of cocky involvement: incentives
D. freedom of enterprise and selection
E. contest

1. big numbers
2. free entry and get out
iii. produce standardized products

F. limited office for government

The Market and the 5Es

i. Economic Growth

Capitalist economies tend to have more rapid rates of growth

2. Allocative Efficiency: Producing what consumers desire

a. Capitalism and incentives and means

(1) more profits = produce more than

(ii) losses = produce less

(three) consumer sovereignty and "dollar votes"

b. Commercialism tends to achieves allocative efficiency

3. Productive Efficiency: Producing at a minimum cost

a. Capitalism and incentives

(1) profits = total revenues - total toll

(2) minimizing costs ways more profits

b. Capitalism tends to attain productive efficiency

4. Equity

At that place is no feature of capitalism which will guarantee equity

Often, the authorities gets involved to aid achieve equity

5. Full Employment

Economists disagree over whether capitalism will upshot in total employment

• Some say aye, and if there is unemployment it is usually caused by government interference
  
• Some say no, and at times government involvement is needed to move the economic system towards full employment

V. Capitalism and the 5 Central Questions

A. Introduction

ane. The five fundamental questions must exist answered by all economic systems.

2. The five fundamental questions are:

a. What goods and services will to be produced?
b. How will the goods and services be produced?
c. Who will get the output?
d. How will the system accommodate change?
e. How volition the system promote progress?

B. What will be produced? (Allocative Efficiency)

one. In social club to exist profitable, businesses must respond to consumers' (individuals, other businesses, and the regime) wants and desires.

2. Consumer Sovereignty and "dollar votes"

C. How volition the appurtenances and services be produced? (Productive Efficiency)

1. The marketplace system encourages and rewards those producers who are achieving least-cost production.

2. The most productively efficient technique will be the i that produces a given amount of output with the smallest input of express resources.

D. Who volition get the output? (Disinterestedness)

i. determined by how the income is distributed

2. Products become to those who are willing and able to pay for them.

3. The productivity of the resource, the relative supply of particular resources, and the ownership of the resources volition decide the income of individuals and households.

four. The resulting distribution of income may not be the most equitable (off-white).

E. How will the organisation suit change?

one. Markets are dynamic - what is efficient today may non be efficient tomorrow as tastes, engineering, and resources supplies change.

2. Prices assist bespeak those changes and the market will respond. This guiding role of prices is essential to a well-functioning market place organisation.

3. In the absenteeism of such signals, authorities or some similar institution would have to determine where resource are allocated, but without knowing what people in gild want. the outcome would nearly probable be allocatively inefficient.

F. How will the organization promote progress?

ane. The market organization promotes technological improvements and capital letter accumulation (economical growth).

2. An entrepreneur or firm that introduces a popular new product will exist rewarded with increased acquirement and profits. (allocative efficiency)

3. New technologies that reduce production costs, and thus product price, will spread throughout the industry as a result of competition. (economic growth)

iv. Artistic destruction occurs when new products and production methods destroy the market positions of firms that are not able or willing to arrange. NOTE: this is good for guild.

VI. The Circular Flow Model of Capitalism

The Circular Period Model

The menstruum of resource from households to firms and of products from firms to households. These flows are accompanied by reverse flows of money from firms to households and from households to firms.

A. Ii Markets

one. product marketplace

A market place in which products are sold by firms and bought by households.

a. how much to buy
b. how much to produce

2. resource marketplace

A market in which households sell and firms buy resources or the services of resources.

a. how many to hire
b. how much we earn

B. Ii Flows

1. real menstruation
2. money flow

C. Reversal of Roles
D. Limitations

East. Diagram

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Source: http://www2.harpercollege.edu/mhealy/eco211/lectures/choices.htm

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