Transcription
Hello everybody, welcome to Macroeconomics, Principles of Economics One. This is ECO 151 here at Luzerne County Community College. I'd like to welcome you to the class. My name is Gary Morozinski, and I will be your instructor.
This is an introductory economics course, which for the first few chapters talks about economics in general and then focuses on macroeconomics. A follow-on course, if you should take it, is ECO 152, and that is a discussion of microeconomics.
So, let's see what's in this course. We're going to talk about and try to understand how people make economic decisions. It's all about economic decisions. And first, we'll be talking about what an economic decision is. But economic decisions are made by individuals, individuals who are, for example, using their resources to make purchases. And economic decisions are also made by businesses who produce the products that the individuals purchase.
We'll talk about how markets shape economic outcomes. So, markets where products are sold. So, it could be the market for automobiles, it could be the market for oil, it could be the real estate market. We're going to be talking about all of these kinds of markets. In each case, the market has a demand side, which is made up of these individuals who are making decisions on purchases. And it has a supply side, where we have businesses that are producing these products and selling them.
So, we'll be talking about how markets shape economic outcomes. The economic outcome could be prosperity, the economic outcome could be recession, and we'll talk about what that means. We'll also talk about the role the government can and does play in shaping these economic outcomes. And we'll talk about different philosophies. Some economists believe the government should be very involved in the operation of the economy and even do the production of it, of all the products. That is an extreme view that not many economists share. And then there are economists that feel that the government should have a very limited role, and that products should be produced by private companies. And that is more the prevailing theory of most economists these days. But we'll talk about what those different types of economic systems can be, where what's varying is the level of government involvement. So, that's a big part of this course. And in fact, we end this course talking about the two types of government policy, economic policy the government can use to influence the economy: fiscal policy and monetary policy.
These three questions you're looking at here are questions that our textbook authors like to pose at the start of every chapter. So, you're going to see these again. This chapter's on the economy as a whole, sort of defining what the economy is. So, these three questions in this chapter mean: What gets produced in our economy? What goods and services, given that our productive resources are limited? We don't have unlimited workers, we don't have unlimited facilities, we don't have unlimited land. There's a limit to each of those kinds of resources. So, what gets produced? What kinds of goods and services? How do they get produced? What do producers think about as they're producing the ways in which they produce them? And then, who gets the goods and services once they're produced? These are the three questions that we'll be addressing in this chapter.
So, what do we mean by the term "the economy"? What exactly does that include? Well, we are the economy. All 340 million of us in the United States make up the economy. We are consumers. We buy the goods and services that are produced in our economy. So, we can make up the demand for goods and services within the economy. That's an important role. If you work, if you have a job, then you also take part in producing goods and services. You are part of the supply of goods and services in the U.S. economy. The U.S. economy, that is.
Now, the idea of scarcity. This is a very famous, uh, assumption. I actually prefer a little bit different term, but first, let's talk about what scarcity is. Scarcity is the basic underlying assumption upon which all economics is based. The fact that we are making economic decisions is due to the fact that resources are scarce. Or, as I said, I prefer the term "limited." Resources are limited because, you may say, well, for someone like Warren Buffett or Jeff Bezos, very rich people, how can you say that resources are scarce? Very wealthy people like that? Well, even Warren Buffett has limited resources, and so he has economic decisions to make with the resources he has available to him.
So, what kind of resources are we talking about? In any economy, there are four types of productive resources. They're called the factors of production. The most important, and the one we talk about the most in this course and all economics courses, is labor. So, you need labor. And you ideally, you would have high-quality labor. High-quality labor would mean workers that are highly trained or highly educated and highly capable, very experienced. So, all these things can vary, but determine the quality of the labor. And you would want to have a stable workforce. So, you need a labor force.
You need land. Land to produce on. So, if you are a business, you need some amount of land. Now, some products, land is very important. Obviously, mining or agriculture, land might be the most important resource that you need. Some other products, though, land is not that important. You need land, but not much of it per dollar of product produced. I'll give you an example. How about financial services? How much land do you need to produce brokerage services or to be an investment bank, investment banking services? That's a product in Manhattan. And all you need is a high-rise building, tiny little piece of land with a high-rise building, and all of the money that's generated in that high-rise building compared to the piece of land that it's on. So, land is not the most important resource. It's labor and information systems.
Now, let's move on to capital. Capital, in an economics course, is not referring to money. It is referring to the facilities and major equipment and tools, including computer systems and networks, that businesses use to produce their products. It's their facilities, their major equipment, including computer systems. That is capital. It even includes software. So, every year, any business has a budget for the coming year, and they set aside some money to upgrade their capital, to build new capital, or acquire new capital, or to replace obsolete capital. If it's technology, you have to, most times, you are replacing the technology, computer systems, for example, the technology used to produce your product before it wears out. You're replacing it because it's obsolete, or maybe not as up-to-date as your competitors. So, you're replacing it. That's part of your capital budget. The money you spend on capital. The capital itself then lasts for several years, or even a lot of years, maybe tens of years if it's the actual facility. So, that's what capital is. Capital resources are the resources that are your facilities, your major fixed equipment, and computer systems.
And then a fourth, special kind of productive resource. It's a special kind of labor resource called entrepreneurship. Now, you've heard this term before. Think about who is an entrepreneur. Well, it's someone who starts a business, right? Or has a new business idea and acts on it. So, how would you describe an entrepreneur? It's important for some of your labor resources to be entrepreneurs. That's the point here. If you're going to have a successful economy. This is a newer concept. By that, I mean 50 years ago, this might not have been one of the factors of production in an economics textbook. But it's so important. So, how would you describe an entrepreneur? What types of, uh, you know, personality characteristics, traits does an entrepreneur have? And you're probably thinking, well, someone who's creative, someone who could think of new ways of doing things, new products that someone else had not thought of before. That's an entrepreneur. Yep, that's true. Someone who is willing to leave a job, a more stable job working for someone else, and strike out on his or her own to start his or her own business at maybe substantial risk. That's not for everybody, right? So, it is said that an entrepreneur has a higher tolerance for risk. You have to. In order to, you know, you can be the most creative person in the world and the most innovative person in the world, but if you don't have a high enough tolerance for risk to act on your idea, then you're not going to be a successful entrepreneur.
Now, we're going to get to this later, but why is, why would an entrepreneur do that? Well, it's the lure of profits. Because if you strike out on your own, start your own business, the profits go to you. So, an entrepreneur could be sitting at a desk working for someone else, being paid the going wage for whatever the job is, an engineer or an accountant or whoever, you know, whatever the job is you're doing, you're maybe being paid, paid a fair wage or even above average wages, but you're looking at the money that's being made by the company and wondering where that's going. That goes to the owners. That's the profits. And then you think, I could be doing this better. I have better ideas. People aren't acting on my ideas. And so, this is why you would strike out on your own, because then the profits go to you.
Now, other types of economic systems that profit incentive did not exist, and that was a flaw of that type of an economic system. This is all coming up, this discussion later, but this is an important factor of production, entrepreneurship. So, those are the four types of resources, factors of production, that you need to be able to produce in an economy, or to be, to be, you know, to produce successfully.
We have economic decisions to make again, because resources are not unlimited, they are limited. And so, you need to think of the best way to use those resources, whether you're an individual or whether you're a business. And so, this is the science of economics.
Here are some types of economic decisions again. You're thinking about the best way to allocate scarce or limited resources among various alternatives. All right. So, here's the first one: How people decide what to buy, how much to work, save, and spend. That's actually what's known as microeconomics. This is macroeconomics, but that is a microeconomic decision. How individual people make decisions on how they're going to use their resources. These are types of resources an individual possesses. All right.
What's the next one? How firms decide how much to produce, how many workers to hire, which is related to how much you're going to produce, right? That is also microeconomics because we're talking about an individual firm making a decision. If you follow me into the microeconomics course, ECO 152, that's maybe like the middle 50% of the course is looking at how an individual business will decide how much to produce, given market conditions, to reach their objective. What do you think their objective is? A business has one overall objective, always: maximize profit. So, there's going to be some one ideal amount of production per day or per week or per month that allows you to maximize profit, and that's how much you're gonna, you're gonna want to produce. Anyway, that is microeconomics.
And then this third one is macroeconomics, more the kinds of things we'll talk about in this course. How society decides how to divide its resources between national defense, consumer goods, and maybe even producing the environment. And you might say to yourself, society doesn't really divide its resources. That, you know, what's meant by that? Well, imagine this. Think of times when our national, you know, our military has needed to expand, or has expanded, I should say. And I've given it away. I want you to think about why would it expand? Well, sometimes it needs to expand because we feel threatened. Maybe we're being drawn into a war, or we are at war. And think of World War II as the best fairly recent example of when this happened. When huge numbers of people, men and women, were drafted into the military and then deployed to different parts of the world. A lot of them went to Europe, but other parts of the world too. But where did those people come from? These were really workers, right? They're being hired by the military. You might not think of it that way, but they were actually paid a salary. So, they were hired to provide military services. That is a product. They were producing. But where'd they come from? Well, they came from other parts of the economy. At that time, they were producing something else. They were producing automobiles. So, some of them came out of the automobile industry. They were drafted out of their jobs there. Some of them were working producing, I don't know, furniture. Some were producing services, healthcare. Well, there is a sacrifice to those other industries when workers in large numbers are recruited and drafted into the military. So, the economy was producing less consumer goods and more military services. So, less consumer products and more military products, military services, defense services. And we'll talk more about that in a second.
Now, probably the most important lesson in this course that you're going to think about every day, and maybe you're already thinking about it. I know I think about this every day, is the idea of opportunity cost. So, once you start thinking about opportunity cost regularly, then you are thinking like an economist, I would say. So, what is opportunity cost? Whenever you make, this is the decision to use your resources in some way, could even be your time, because that's a resource, then the true opportunity cost of using the resources that way is whatever you gave up when you used your resources that way. There's some other way you could have used those resources to buy something else, or use your time to do something else. You gave up the opportunity to do that. And we'll talk about this. We'll look at lots of examples.
Another way of putting it: Opportunity cost is the most desired goods or services foregone, that means given up, to obtain something else. Let me give you an example that I like to use. Imagine that you are a student at, uh, let's say, Wilkes University, and you are an accounting student, and you are graduating, and it's May, and you're a senior, you're graduating now. And suppose Wilkes University makes an offer to all of its graduates that if you stay in school for 12 more months and work on an MBA, we will give you a special tuition rate of just fifteen thousand dollars for that year. That'll be the cost of the tuition to get that MBA. So, you have to take courses in the, in the, let's say, the summer, and then the following fall and spring. All right. So, you need 36 credits. You can do that in one year, 12 months, and we're gonna charge you just fifteen thousand dollars for tuition and fees. That's the total cost they're going to charge you. All right.
So, what is the total cost of that MBA? Well, the most obvious cost you think about is tuition. That is what's known as an explicit cost. This is actually not in chapter one. This is actually something we talk about in more depth in the second course, microeconomics, but that is an explicit cost. You can see the dollars right as you're paying them. But there's another cost. What other cost are we ignoring if we say the total cost of this MBA is only fifteen thousand dollars? Well, what about the salary I could have earned as an entry-level accountant working at a local accounting firm, or work for any business, really? And let's say that the going rate was is fifty thousand dollars. So, these, that's my economic decision to make, right? When I graduate, I can go right into the labor force and start earning fifty thousand dollars and make fifty thousand dollars in that first year, or I could stay out of the labor force and work full-time on this MBA, and that will cost me fifteen thousand dollars. So, there is an implicit cost. Again, that's a term that's not in this chapter. It's a preview of economics 152 to use that term, but that isn't, that is an implicit cost, an opportunity cost of fifty thousand dollars foregone salary, or given up salary, foregone wages. And these terms are used interchangeably. Wages and salaries, either one, you could use either one in any of these cases.
So, not only am I paying fifteen thousand dollars to Wilkes University, I am also giving up the opportunity to earn fifty thousand dollars. So, the total economic cost, including the opportunity cost, is sixty-five thousand dollars. So, you have to think about that when you're making that decision. Now, I'm not saying you don't make that decision, but you would still do that, maybe because that then positions you to earn more in the future years once you have that MBA, or maybe even your initial starting salary might even be higher than fifty thousand dollars. It might be sixty thousand. This is the reason that you would do that, but you do need to make that decision with a full understanding of the full economic cost. It's the implicit cost plus the explicit costs. In other words, you have to also include opportunity cost.
So, back to this issue of what happens when the military expands. Well, there is an opportunity cost to the economy of foregone production of other things, domestic goods and services. And the guns versus butter debate is referring to guns represents military spending or dedication of resources to the military. And then butter represents consumer goods and services, production of consumer goods and services like butter. That's a staple food item. And so, how much should we spend? Well, I don't know. How much are you willing to give up in the production of other goods and services? After 9/11, Americans overwhelmingly favored increasing military spending. And in fact, we even created a new federal government agency, Homeland Security, because we felt threatened. So, we were willing to do that because it would make us feel more safe. We felt like it was necessary. Where did all those workers come from? Those workers that were now working in Homeland Security, they came from other industries. There was a sacrifice to the system because we only have X number of, uh, productive, of that productive resource, labor, in our economy.
I'm going to pause here, and we will come back to this and talk about the production possibilities model. This is the first economic model that you'll be exposed to in this course. So, stay tuned.