Mac Econ Chap 2 – the problem in Economics

ECONOMIC PROBLEM

INTRODUCTION

The economic or economizing problem is identified to be the efficient use of scarce resources to meet the unlimited wants of society. The wants are verified to be unlimited. The resources are cataloged. The economic problem is studied with the help of the production possibilities curve which shows that a choice is necessary and that economic growth is only possible if resources are efficiently used and expanded.

UNLIMITED WANTS

The wants of individuals can be shown to be ever increasing by observing that items which are considered as luxuries often become necessities after a while.

People never seem to be satisfied with what they have: they always want more. While this may appear to be greed, it may simply reflect the desire of man to seek improvement.

NECESSITIES

Items which people cannot do without are said to be necessities. This would include basic food items, shelter and utilities, for instance.

Everyone has a different set of items he or she cannot do without. Water, food and shelter immediately come to mind. For a sick person, a medication may also be a necessity.

SCARCE RESOURCES

Resources are both human and non-human. The human resource is primarily labor. Non human resources are land and capital.

The supply of all resources is just what we have today and increasing it in the future requires sacrifice.

All resources are limited. One need only visualize a crowded downtown street to realize that the most desirable location are scarce. Capital is also in short supply because its production requires time and foregoing consumption goods. Even labor is not excessive because none of us have spare time to waste in our adult working years.

LABOR

Labor includes all forms of work. Such work often requires skills. Skills are enhanced with accumulation of human capital which consists of education, training, good health and mobility. The compensation or price for labor is known as wage.

All forms of human endeavor require attention and effort. One may only hope that the work one has, is also pleasurable, but it is work nevertheless. That is why it is call labor. It is applicable to a ditch digger, as well as to a scientist, accountant, musician or artist.

LAND

Land is a free gift of nature. It includes a parcel of land as well as all that can be extracted from it (minerals, wood, agricultural products). Since only what is on earth is now available for man, land is, therefore, clearly restricted. The compensation for use of land is rent.

It is sometime difficult to distinguish land from additions or improvements to land; these are not land, but capital. These additions and improvements can be further increased because they are the work of man. On a parcel of land, more and better houses can be built. But, land itself cannot be changed: it is just that parcel.

CAPITAL

Capital is all forms of means of production: factories, machines and equipment. Capital can be increased only by devoting resources away from consumer goods production. In addition, it often takes time and large sums of money. The compensation for use of capital is interest.

A factory with many machines is what is needed to produce many goods, and that is what economists call capital. It is clear that the factory and machines have required substantial production, work and assets. But, these have not been consumed: they have been accumulated to permit production of other goods. While in common language, the accumulation of monetary assets is the focus of capital, for economists it is the physical capital which is important.

ENTREPRENEURIAL TALENT

Entrepreneurial talent or entrepreneurship, is the ability of a business owner (or business organizer) to put together all the necessary resources to make the production of goods or services possible. The compensation of entrepreneurial talent is profit.

The United States is blessed with an entrepreneurial population. Approximately half a million businesses are formed every year. Unfortunately, the great majority fail the first year. Indeed, entrepreneurs have to take a big risk. But, the one who succeeds may one day own a major corporation.

PRODUCTION POSSIBILITIES

CURVE The production possibilities curve show the combination of two goods which can be produced by a country. The curve is concave (as viewed from the origin) because of the law of increasing cost. The curve is a boundary: outside is not achievable, but inside is inefficient.

Graph G-MAC2.1

production-possibility-curve

useful statistic calculated by the Commerce Department is plant capacity utilization. This statistic shows what proportion of our nation’s productive capacity is being used, and therefore what proportion is left unutilized. These numbers can only be obtained if a measure of the total production capacity of the nation is estimated. This is one of the conceptual goals of the production possibilities curve.

LAW OF INCREASING COST

If a country attempts to increase the production of one good, it will have to give up an ever increasing amount of the other good because the resources are not equally productive in different productions. Because of this increasing opportunity cost the curve is concave (as seen from the origin). This imposes a difficult choice on each society in deciding which combination of goods best meets the tastes of its people.

Resources are NOT equally productive in different types of productions. They tend to be specialized. This is especially true for employees who are normally most productive using their best skills. If a nation attempted to increase the production of one good by shifting employees away from the jobs in which they are most productive, total output would decrease. That is stated in the law of increasing opportunity cost.

EFFICIENCY

Any point inside the production possibilities curve is causing resources to be either unemployed or underemployed. One of the goals of economics should be to avoid such situations and to seek maximum potential production and consumption.

When the plant capacity utilization statistic reported by the Commerce Department is very low, it shows that the nation is not very efficient at utilizing its productive capacity. This indeed occurs during periods of economic slowdown: for instance, during the great depression of the 1930’s.

ECONOMIC GROWTH

Points outside the production possibilities curve are not achievable without expansion of the available resources. This requires that some resources be directed to the production of capital goods (thus sacrificing some consumer goods). In addition, technological progress is also often necessary for expanding the use of the existing resources.

Graph G-MAC2.2

economic-growth

A study undertaken by Edward Denison revealed that the growth of the American economy has been attributable to increases in the factors of production (labor and capital in particular), but a large proportion of the growth is also attributable to improvements in productivity.

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