Transcription
How's it class? So, this is the lecture for chapter 2 from our textbook. This chapter is a, a nice introduction to where we kind of take some theories and ideas in economics and we squash it into a mathematical type of format, particularly an equation of a line. And of course, we go away from just a straight line with a constant slope, and we also add the curvilinear. But we're not going to do any real math regarding that, but just understanding the, the equation of a line, the negative slope, and the implication of what a negative ratio of the rise over the run can imply and so forth will be important to understanding a few things, particularly opportunity cost when we should try to show it graphically.
This chapter is about scarcity, opportunity costs, and a few other concepts such as growth and savings and consumption and so forth. So, anyway, let's start off with, uh, the first topic up the tops. Is does everyone suffer from the problem of scarcity? Do college students? Yes, obviously. You guys suffer from a lot of different types of scarcity, whether it be money, whether it be food, whether it be sleep, whether it be lectures, or whether it be, uh, time of all different for all different types of activities that we want to do. So those are the different types of scarcity.
How about Jeff Bezos? If you're not familiar with who Jeff Bezos is, uh, welcome from, uh, coming out from under a rock. He is the, uh, founder and owner of, well, uh, the founder and, uh, the CEO of Amazon and considered the wealthiest man in the world, probably going to be our first trillionaire, I think is what they say. Does he suffer from scarcity? The wealthiest man in the world? You know, and if he does, what sorts of scarcity? A lot of people might say things like time again, possibly real friends, um, you know, things like that, things that, uh, sometimes people say money can't buy. And of course, there's a philosophical argument behind that as well, that people could get into an argument about, uh, things that money can buy versus what they can't buy. Anyway, what seems to be the scarcest thing around for a lot of people? It is time. You can be the richest person on earth and still not have enough time.
So, let's define scarcity. And again, in economics, we take very commonplace words and now we attach some specific meanings and conditions. So scarcity is when the ingredients or resources for producing things that people desire are insufficient to satisfy all wants. And remember, wants are what we would buy if our incomes were unlimited. So, therefore, scarcity is always in existence because if our incomes were unlimited, any type of good, in quotes, good is something that we probably want on some level. What scarcity is not, though, to be, to be aware, these are the typical types of things that goes into a trick question, what are not trick, but seemingly trick question. What scarcity does not is, it's not the same thing as a shortage, and it is not the same thing as poverty. Um, when we had COVID, uh, rushed to Costco, everybody went to, uh, to go and buy things like, uh, bottled water, okay? It's not a hurricane, but whatever, uh, spam and rice, and of course, the big item, toilet paper, right? Everybody wanted toilet paper for some reason. And of course, Clorox wipes. And of course, Costco or whatever, whatever other stores they ran out. Uh, now the thing is, even when we go and all those things are on the shelf, we still suffer from the problem of scarcity. Scarcity is not a shortage. That's a different thing. You know, shortage is when the shelves are empty. Even when the shelves are full, we still suffer from scarcity. And it is also not the same thing as poverty because Jeff Bezos does not suffer from issues of poverty, but he does face the issues of scarcity.
Okay, some other words to, uh, define. Production: any activity converting resources into products that can be used in consumption. Any activity. So, it could be, uh, it could be hammering a nail into a piece of wood to make a chair, or it could be filing paperwork in somewhere, keeping records of the production process. So, these are all production activities. And we're also going to define resources. Resources, we're also going to call them factors of production. So, I tend to say factors of production most of the time because it gives it a little more clarity. But resources or factors of production are inputs that are used to produce things that people want. Now, we have five resources or five factors of production that pretty much everything can be classified under. The first one being land. Land is natural resources or the gifts of nature. So, that's saying that land, when we talk about land, it's not just the geographic topography, it's also the other aspects of it, the gifts of nature. It could be the stream running through it, it could be the minerals that, uh, that lie beneath the soil, uh, the agriculture that sits on it. So, land could be a lot of things, not just the dirt and the, uh, the geography.
The second one is labor. Labor is going to be the human resources. Uh, so when we talk about labor for this category, we're talking about the number of workers. The number of workers. And when we get to number four, I'll, I'll go and distress why we, why I stress that that comment right there. The third one is going to be physical capital. Physical capital is all manufactured resources. For the majority of the chapter, we're going to be talking about capital in terms of physical capital, manufactured resources, things like trucks, things like machinery, things like infrastructure for, for internet, for energy. Physical capital could also be paper clips and staples, computers, all manufactured resources. We're not talking about capital when we, uh, in terms of liquidity or financial liquidity. That's a different type of capital. And so the majority of this class will be talking primarily about physical capital.
Now, the fourth one, uh, refers to the second one a little bit, but it's a subset of labor. Human capital. Human capital is a subset of labor. Human capital is accumulated training and education of our workers. And human capital, um, it's possible to hold labor constant, not get any more strong, you know, laborers or hard workers and so forth, and just improve the training and education of workers, and we can get more output out of our existing labor. So, labor number two is the number of workers. Number four is the training and education of the workers. And the higher the training and education, the higher the productivity it tends to be. Okay. So, human capital is a subset of labor, but it's important enough to get its own category in terms of number four here. And then the fifth one is entrepreneurship. Entrepreneurship is the labor that organizes, manages, and assembles the other resources. They're important enough to also get their own category because they are the risk taker. They are the maker of basic business policy decisions. Without the entrepreneur, then essentially all of our resources or all of our factors of production will sit idle and not be assembled and turned into an economic engine.
Okay, some other, uh, some other terminology. Goods. Goods are all things from which individuals derive satisfaction. Goods, as you can see, it's a very general statement. If we get a little more specific, we can talk about economic goods. Economic goods are goods and services produced from scarce resources. Okay. And then services. Goods and services, you've heard of those terms together. Services are simply tasks that are performed for someone else. Could be medical services, legal services, it could be janitorial services, things like that. Okay. And again, we need to remind us that we talk about wants and needs. We focus on wants. We tend not to talk about needs. Needs are objectively undefinable. Could be wish, we want life-saving necessity, we could argue about those. Uh, things that we say we need, someone might say I need a new car. Someone might argue with that, say you just need a bicycle and two strong legs, things like that. But they can argue. When we say we want a new car, that's a whole different aspect. Wants are desirable goods. And of course, people have unlimited wants because it's as if our income was unlimited.
Okay, so scarcity, choice, and opportunity cost. Opportunity cost is one of the gold star ideas in economics. Generally, when I talk in an introductory course, I say there are generally three gold star ideas in economics. One of them being opportunity costs, the other one is is supply and demand of some sort and equilibrium, and the third is the marginal, uh, decision making method, the method of making decisions at the margin. And we oftentimes just summarize that as our, as our optimization solution where marginal benefit equals marginal cost. So, those are the three gold stars: opportunity costs, supply and demand, and our optimization solution, marginal benefit equals marginal cost. And the majority of economics surrounds these three ideas. And opportunity cost is a cost that economists tend to hang their hats on and say, this is kind of what makes us different from a lot of the other analyses out there, is that we look at the opportunity cost, not just a dollar value. So, opportunity cost is the highest value next best alternative that must be sacrificed to attain something or to satisfy a want.
Okay, so just as an example, what are some opportunity costs of attending class? Some people might say, well, it's the, I don't know what it is, nine thousand dollars, uh, for my enrollment fees. Actually, opportunity costs are the things that you give up. Okay, the highest value. So, in terms of what are some opportunity costs, could be attending class, it could be sleep, you gave up sleep. Uh, it could be job, uh, skills that you obtain while working a job. Uh, it could be the lunch date that you have, you could have had with somebody. Well, maybe not in a pandemic, but under normal, okay, the Zoom date that you could have had with somebody. Or the other side is, what is the opportunity concept working at a job and not going to school? When you work at a job, you give up possibly a higher growth curve slope. In other words, uh, you know, your growth income path might be a lot higher, faster, had a higher rate of increase, uh, than if you didn't work your job and instead went to school. So, that's an opportunity cost concept. So, in economics, cost is always a foregone opportunity. Just like a rail system, a lot of people look at the round, they look at the dollar value. It's not just the dollar value that we're wasting on that big rusting hunks of metal and tracks and decaying concrete already before we even get our first legitimate ride on the rail. The, the opportunity cost is all the other things that we could have purchased or could have implemented with the money that went into the rail. That's what we really gave up. We chose a very old technology. We chose a technology that had incredible costs because the value of land on Oahu is very valuable, very pricey. So, it makes just trying to get this project going through these lands that we have to purchase or condemn through eminent domain or so forth, it makes it very expensive.
So, taking a look at the fundamental problem, if you remember, uh, the concept of limited resources and unlimited wants, the idea of the definition of economics dealing with limited resources, unlimited wants, it leads us to the problem of scarcity. And when we're faced with the problem of scarcity, we're forced to make choices. And whenever we make a choice, we bear an opportunity cost. So, this is the fundamental issue: limited resources, unlimited wants leads us to scarcity. When we face with scarcity, we're forced to make choices. And when we make a choice, we always have a foregone opportunity, the opportunity cost.
So, what we're going to do next is look at the opportunity cost graphically. What we're going to do is introduce something called the production possibilities curve. The PPC represents all possible combinations of total output that could be produced. Okay. So, we're going to acquaint ourselves a little bit with this diagram. But before we do, let's take a look at a few of the concepts of the production possibilities curve. There's some assumption that goes with it. The first one is that when we're on the production possibilities curve, resources on that curve means are fully employed. We're using everything that we have to produce. Number two, the production is for a specific time period. In other words, it's a snapshot in time. When you see that diagram, it's not overtime until we add another PPC to show the transition of time. But one by itself, it's a snapshot in time. Okay. The third one is that resources are fixed for the time period. We're not going to get any new resources, no more fuel, no more wood, no more, uh, other types of oil and other minerals that we know. They're fixed for that time period. And then finally, technology does not change over the period of time. So, like taking a look at those four assumptions, any concept that comes to mind might be ceteris paribus, holding all other variables constant. That's what we're trying to do. We're trying to hold all other variables constant so we can kind of get a view of what, for example, whether it be a firm, whether it be a country, what they could possibly produce as shown by this function of the PPC.
Okay. Also, let's define technology. Technology is simply, uh, society's pool of applied knowledge concerning how goods and services can be produced. Okay. So, that's a little bit more general than what you might be thinking when you think of technology. You might be thinking of hardware and software in terms of computer and electrical components. But technology can simply be methods. Methods and will also fall under the concept of technology in macroeconomics.
Okay. So, looking at our production possibilities curve, our PPC, we're going to be using two goods only. We're looking at a two-dimensional graph, uh, using an X and Y axes for two goods only. And we're going to use A for apples and B for basketballs. Okay. So, taking a look at a setup for a potential PPC, I have it labeled 0 to 20 on both axes with increments of 5. And let's just say that we are looking at a situation where we're at this point where we have 20 units of A and 0 units of B. That's essentially saying that in this period of time, we, if we spent all of our resources, all of our value factors of production producing apples, this is where we would be. On the other hand, suppose that we decided to make zero units of apples and devote all of our resources to making basketballs, then in that case, we would be at that point on the vertical axis. Now, of course, we can mix it up. We can, uh, we can have different units produce the basketballs and different units of apples. And let's just say we're doing things as efficiently as possible. And one potential version of a production possibilities curve would be that. Okay. So, it's a linear function. So, we call it a curve, but it's, it's good enough. Uh, and that's a situation where our PPC is a straight line. Now, if you know the nature of a straight line is that the opportunity cost is going to be a constant value. As you go and produce one more of the other, what you give up of in terms of the other units is going to be the same every time you produce one more unit of, for example, A or five units of A, anywhere along this PPC, we are being what we considered efficient in production. Anywhere along this PPC, okay. And obviously, that's where you would like to be.
Now, some other places that we could be. We could be at this point inside the PPC. This is considered an inefficient point. Okay. That means that we are producing, for example, five units of basketballs and 10 units of apples. In this case, well, it's possible to produce more units of apples out to this point and not sacrifice any basketballs, or likewise, we could increase our production of basketballs and not sacrifice, in terms of this point, any apples. Okay. So, that's, this is what we consider inside the PPF or PPC, sorry, is considered an inefficient point. On the other hand, any point outside to the right of our PPC, this is considered an unattainable point, unattainable without economic growth.
Now, if we experience economic growth, economic growth could be a rightward shift of the PPC, or it could just be a pivot of the PPC. Uh, but let's just do a rightward shift of the PPC to exhibit the concept of economic growth. So, if the PPC shifts rightward like this, and now this unattainable point is no longer unattainable, it is now on what I drew as the new PPC production possibilities curve. And we got there because we experienced economic growth. But economic growth occurs over time, and therefore, it won't be represented by the first PPC that we see sitting there.
Okay. So, let's take a look at the concept of opportunity costs. I'm just going to write it up. Cost, opportunity cost, using the PPC, it's a movement along the PC. It's a movement along the PPC. So, for example, if we are at this point up here where we're spending all of our resources making basketballs and zero units of apples, what is the opportunity cost of increasing output of apples from zero to five? Well, the opportunity cost, what we sacrifice in this case, will be five units of basketballs. Opportunity cost is always stated in terms of what you gave up. So, to gain five units of apples, what we gave up is five units of basketballs. What is the opportunity cost of increasing our output from 5 to 10 in terms of apples? Well, again, the opportunity cost is going to be for gaining five units of apples, the opportunity cost is five units of basketballs. So, this is why we say a movement along the PPC is how we show the concept of opportunity cost.
Okay. Now, one thing to note, as we continue to increase our production of apples, what we're giving up in terms of basketballs pretty much will remain the same. It's going to be a constant opportunity cost. For five units of apples, the opportunity cost is going to be five units of basketballs. Now, that is actually probably an unrealistic situation given our two outputs. If you think about the things that go into making apples, if you are going to sell apples relative to basketballs, oops, basketballs, the input resources are very different. You can ask, well, what do I need for apples? You're going to need a lot of land, soil, you're going to need irrigation and water, you're going to need a PVC probably for the irrigation, you're going to need seed, you're going to need fertilizer, you're going to need laborers to work the fields, you're also going to need some harvesting equipment and other type of equipment that goes along with it. I don't know, I've never run an apple orchard, but anyway, those are the type of thing that goes into making apples. On the other hand, basketballs will use very different things. You don't need seed, you don't need fertilizer, you don't need that much soil, you know, very different inputs. So, this straight line, which has a constant opportunity cost, is probably not the best shape for these two mix of goods. So, let's talk about how that changes and how it will change the look of this PPC when we have two specialized goods that we're trying to produce, meaning that input, some input resources, land, labor, physical capital, human capital, entrepreneurial activity, all those things are better suited for producing one good versus the other good.
Okay. So, I, I regenerated the, uh, the PPC again without actually adding the curve yet because now we're going to address the issue of two different types of goods where we have specialization of inputs, where some resource inputs are better suited for producing apples versus basketballs, and some better for basketball versus apples. Okay. So, what we're going to do is we're going to start at a position here where we're producing using all of our resources to produce nothing but apples and we're doing zero basketballs. And what we're going to do is take a look at it in terms of the opportunity cost. So, what we're going to do is we're going to look at going from zero basketballs to five, and then we're going to look at the opportunity cost in terms of apples. Then we're going to go from five basketballs to 10, and again, look at the opportunity cost in terms of apples. And then 10 to 15, and 15 to 20 for basketballs. Okay. Now, notice that we're going to be moving up in increments of five for basketballs. So, we're going to be going up five, five, five, and five. Okay. A constant. That way we can see any changes in opportunity cost by holding the incremental increase constant to five. Okay. And then we're going to, we're going to kind of just talk this through and see what makes sense. Okay.
So, here we have a situation where we are currently spending all of our resources for apples. Now we want to increase zero to five and get five basketballs. So, I guess the question is, of all the things that you have, what type of inputs are you going to transfer from making apples to basketballs? And if you think about that, you probably have a list in your head. But let's just summarize that and say we're going to transfer the things that were least useful for making apples and that were most useful for making basketballs. So, when we give up, what we give up in terms of apples should be very little. In term, and then in terms of what we get in basketballs for the five units, well, the relative change, the cost, the opportunity cost will be small. In fact, let's just say that it's one unit. So, we go from 20 to 19. So, now we have an idea of the next point on our production possibilities curve, going from 20 now to 19. Okay. That's one point. Okay. So, what we can say then, going from zero basketballs to five, the opportunity cost in terms of apples was one unit of apple. Now, we want to go to this next increase from five to 10 basketballs. Now, let's just say we're going to move, we already moved the stuff that was best suited for basketballs. So, now we're going to move the stuff that was next best suited for basketballs, but it wasn't as good as the first group of resource inputs that we moved. So, let's just say that for the next increment of five, so now we're moving up from five to 10, let's just say we have to go down to 16 units of apples. Okay. So, we gave up the first, the first group, we gave up one unit of apple for five basketballs. The next five basketballs cost us three units of apples, and we also get the next position on our PPC. Okay. And then so forth and so on.
Let's just say that last jump from 15 basketballs to 20 gives us here. So, that was 10 down to zero. So, the opportunity cost in terms of apples, finally, to get that last point was 10. Now, how did I come up with those numbers? I just made them up. I just made them up to go along with the theory. I hope you agree that it makes sense in terms of the relative change, the relative opportunity cost. And now, if I were to connect the dots, might not be the prettiest, but if I were to connect the dots, now we have a new look of our production possibilities curve. No longer is it a straight line. Now it is bowed out from the origin. Okay. So, we have two different looks at PPCs, production possibilities curve. Both are relevant. Both could be what we're discussing, depending on what goods.
Okay. Getting back to the power points, moving on to the next slide takes us to the law of increasing relative costs. The law of increasing relative cost says, as society attempts to produce more of a good, the opportunity cost of additional units generally increases. A society attempts to produce more of a good, the opportunity cost of additional units generally increases. And that's what happened. That's what we saw. Okay. So, the question is, how does this specialization of inputs influence the shape of the production possibilities curve? Well, you just saw it in action. Is it straight or bowed out? It's going to be bowed out.
Okay. So, we're going to stop here for now. Uh, this should get you started on chapter two. Uh, we got a couple more ideas that we need to cover, so there'll be a second video. But I don't think, uh, videos, uh, too long, are, are well suited for students who are having to do distance learning. It's a lot to ask you guys to sit in a 30-minute video like this. So, hopefully, this was helpful though, and it gets you over some sticking points if there were any. We're going to get to some other aspects such as economic growth, comparative advantage, and the concept of specialization a little bit, and it's all about increasing output and so forth. And then so that'll all be in the upcoming video to come for next time. If you have any questions, please be sure to include both the TA and me in the emails. One of us will get back to you. And, um, hope you guys are having a great day. Stay safe, stay healthy, and we'll look forward to talking to you soon. Aloha.