Section 01: The manufacturing Process
The manufacturing Process
The production process involves converting resources (aka: components of production, or inputs) into goods and also services.
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There are four main category of resources: land, capital, labor and entrepreneurship.
All herbal resources both above and below the floor are component of the land source including farm land, animals, forests, water, minerals, and also air. For the use of these resources, businesses pay a rental income.
Capital includes man-made items such as buildings, machinery, and equipment. Unequal consumer goods that straight satisfy our needs and also wants today, capital goods, such as machinery, rise our future productivity which then enable us come produce much more of the goods and also services we desire in the future. Interest income is the return or payment for the use of capital. Keep in mind that while money is often referred to as capital, that is no an economic resource but simply permits or facilitates the purchase of one of the resources.
The labor source includes both the physical and mental contribution of a worker. As a return for the use of your labor, workers space paid a wage. Education and also job training increase the efficiency of the labor source and thus increase wages – together we’ll see later on in the course.
The last resource is entrepreneurship, which combines the various other resources and provides a an excellent or service. These individuals take risks and are rewarded with profits once their concepts are successful.
All entry or factors of production have the right to be categorized into one that these 4 resources.
See if you can classify each of the complying with resources. Do any type of of castle fit into more than one category?
|A worker in a basic Motors plant|
|A copy machine|
|An irrigation canal|
Section 02: one Flow and also the sector System
Circular Flow and the sector System
Every culture faces some an essential questions: What goods and services to produce? just how to produce those goods and services? and for whom? just how a culture chooses to answer these concerns will in a huge part recognize the prosperity that the society, its circulation of wealth, and the variety of products and services available. Cultures answer these concerns either v a decentralized mechanism using markets, a command or central system using government planning, or some combination of the two.
In a market system, the family members own the resources and willingly it is provided those come businesses in the resource market in return for a payment for the usage of those resources. Mental that families are paid salaries for their labor, interest for your capital, rental for their land, and profit for their entrepreneurial ability. Businesses room willing to acquisition the resources, noted they can convert them right into goods and also services that will return at least a normal profit. The quantities and prices of sources are determined by the supply and also demand the the resources in the resource market.
Households usage the payments they obtain from the use of their resources to purchase goods and services the businesses produce. The provision and purchase the goods and also services takes ar in the product market. In the center ring is the circulation of resources and also goods and also services, if the external ring is whereby the financial transactions take place. In this basic circular circulation diagram, we see the simple flows and workings of a market economy.
Market system Questions
There space three main questions that industry systems answer for a society.
1. What to produce?
2. How to produce?
3. Because that whom to produce?
Capitalism is a industry system that depends on private property and the use of markets to price the societal inquiries of what come produce, exactly how to develop it, and also for whom. A key feature of capitalism is that individuals act in their own self-interest as they look for to boost their well-being. Families willingly it is provided their resources so the they can purchase goods and also services i beg your pardon they value more. Since consumers room able to acquisition the goods and also services castle want, castle vote with their dollars and also signal to the industry what is of value to them. If a company is not creating what is in demand, they will find that lock are much better off to usage their resources creating something rather that consumers want. Hence in a market economy, the consumers room the ones that ultimately determine what will be produced.
Under capitalism, people are rewarded for their contribution based upon how society values that contribution. This is one factor why the church strongly motivates each member to gain a good education. If pure capitalism rewards people for your contribution, people are also exposed come the dangers of the sector if they room not developing what consumers want. This gives an motivation to work towards best meeting the needs and wants of consumers, however it additionally can cause a large variation in the distribution the income.
Consider the emphasize sentence in the complying with quote by president Hinckley:
--Gordon B. Hinckley, Teachings the Gordon B. Hinckley, 172–173.
As Adam blacksmith outlined, each human seeking their own self interest in turn promotes the finest interest of society by developing those goods and services many desired, all as if by one invisible hand. Follow to him, every individual, seeking only his very own gain, "is led by an invisible hand to encourage an finish which was no component of his intention"--that end being the general public interest.
The check out of capitalism is that markets duty without government control, hence it does not need government intervention. The term Laissez-faire is French, essentially meaning leave that alone. Under capitalism, businesses have actually an motivation to always produce in the least price manner. If they space not developing in the least expense manner, another business would have the ability to produce the product at a lower cost, undercut the competition, and also take far sales. As brand-new technologies are developed, firms have actually an motivation to adopt the technologies if doing for this reason will allow them to produce at a lower cost. Through the use of the markets, goods and services will certainly be dispersed to those who are willing and also able to salary the sector price; thus, the industry price serves together the rationing mechanism, determining who gets the product.
An different economic system is socialism, in i beg your pardon the government seeks to use the nation’s sources for all of its citizens, rather of letting the citizens use the sources in the way they finest see fit. Thus, under socialism the government owns or controls the property and also answers the three questions of what to produce, how to produce, and also for whom. There room different degrees of socialism, one being Communism, that was envisioned by karl Marx consists of cumulative ownership that resources and decisions do by central planning committees. Under socialism, there is one pie the is split among all of the citizens. Unfortunately, main planners with the ideal intentions might not have the ability to represent each individuals preferences in your choices. Due to the fact that of scarcity, central planners should decide not just what come produce, but likewise how come ration the created goods and also services amongst the various consumers (recall over there will constantly be endless wants and limited resources). The an obstacle of determining that gets a product is regularly lost top top the casual observer that centrally planned economic situations – but this is one of the most complicated decisions that needs to be made – who will walk without! Winston Churchill stated: “The natural vice of capitalism is the unequal sharing of blessings; the inherent virtue the socialism is the same sharing the miseries.”
Most countries in the world, consisting of the joined States, use a mix of private and also government enterprises come allocate the nation’s sources in offering goods and services. This mixed economies count on the private sector to produce and also allocate specific goods and also services while the federal government controls the delivery of other goods, such as welfare and also Medicaid in the unified States.
The united Order
As members that the Church, we acknowledge that there will certainly some day be an economic system in place that will certainly be uniquely various from the present economic systems of today. That device is sometimes referred to as "The united Order."
In the united Order, individual residential or commercial property rights will be critical component in the economy. Marion G. Romney taught: “As come property, in harmony v Church id as set forth in the Doctrine and also Covenants, no government can exist in peace, other than such regulations are framed and also held inviolate as will secure to each individual the free exercise the conscience,
The united Order, according to Elder Harold B. Lee, is “more capitalistic … 보다 either Socialism or Communism, in that personal ownership and also individual obligation will be maintained” (In Conference Report, Oct. 1941, p. 113.). J. Reuben Clark, Jr. Said: “The Church never ever was, and under existing commandments never ever will be, a communal society, under the directions thus far given through the Lord. The joined Order was not communal nor communistic. The was totally and vigorously individualistic, with a consecration that unneeded surpluses for the support of the Church and the poor.” (J. Reuben Clark, Jr., “The joined Order and Law of Consecration As collection Out in the Revelations the the Lord,” from a pamphlet of posts reprinted native the Church ar of the Deseret News, 1942, pp. 26–27.)
Circular circulation with Government
When federal government becomes a player in the economy, they interact with households and businesses through taxation and also transfers. The government also purchases sources from the resource markets as well as goods and services from the product market. As the economic climate opens profession with various other countries, international nations demand and supply goods and also services in the product market, as well as demand and also supply resources in the resource market.
Think about how the fear of a recession would be reflect in the circular circulation diagram. Exactly how would consumers react? exactly how would producers react?
Unfortunately, family members expectations often become “self-fulfilling prophecies.” If family members fear that they may shed their project if a recession occurs, they may start to invest less and also save because that the “rainy day.” This diminish in the need for goods and services in turn reasons businesses to demand fewer resources, and the project cuts that were expected occur.
Section 03: production Possibilities Curve
Production Possibilities Curve
As a society, we develop literally thousands of different goods and also services. To far better understand the trade-offs challenged by an individual or society, we room going to usage an financial model dubbed the production possibilities curve (PPC), sometimes referred to as the production possibilitiesfrontier (PPF). Recall that an economic model is asimplificationof the actual worldand is designed come illustrate financial theories. In this case, we will assume that just twodifferent items or services deserve to be produced. Theproduction possibilities curve shows the maximum mix of thesetwo products or services that can be produced given ours present technology and resources.
Let’s say that our course represented a country and also we were going to develop houses and software programs. Provided our current modern technology and resources, the table below shows the different combinations of houses and software programs that we might produce together a culture during the next year making use of all our resources in an efficient manner. The curve top top the graph is the manufacturing possibilities curve or frontier which mirrors the maximum combination of houses and also software programs us are qualified of producing.
The PPC has actually a bowed the end or concave shape, due to the fact that some resources are far better at producing one item 보다 they space another. A hammer is a good tool for structure houses, however has tiny use in arising a software program program. Likewise, those through programming experience may do a great job computer programming, yet lack building and construction skills.
To be on the production possibilities curve, us assume that an innovation and sources are fixed and also that we space using all of our resources. We additionally assume production efficiency meaning that we space unable come produce more of one calculation without developing less that the various other output. Note that every mix on the line and below the line is attainable when those points exterior the line are not attainable, offered our present resources and also technology. Since we have restricted resources, the production possibilities curve shows scarcity due to the fact that we are restricted on the quantity of goods and services that deserve to be produced.
Marginal opportunity Cost
The manufacturing possibilities curve additionally reflects opportunity costs, since to get an ext of one good we need to sacrifice some of the other. The marginal chance cost procedures the quantity of a great that needs to be sacrificed because that each added unit the the other good.
When everyone is working on houses we can create 20 dwellings annually. If we wanted 2 computer system programs we would have to sacrifice two houses. For this reason the marginal opportunity cost would it is in 1 residence for each added computer program. Who would be the people we would desire to relocate from construction to programming? most likely those individuals who are good at programming and not very good at building houses.
If we wanted secondary 2 computer programs, we would have to sacrifice 4 dwellings or 2 residences for each added program. Keep in mind that the marginal opportunity cost is increasing.
As us want an ext and more computer program the number of houses we have to sacrifice per computer system program increases. The enhancing marginal opportunity price is because of the truth that some sources are much better suited for developing one great than another. Eventually, we have to take experienced construction workers and set them under behind a computer and also tell lock to start programming.
As we relocate from allude A to suggest B, we sacrifice one residence for each added program. As we want more programs, the marginal opportunity cost increases come 2, climate 3, and finally together we move from allude D come E, we have to sacrifice 4 homes for each additional computer program. Hence we check out that we have an increasing marginal opportunity price as an ext of the great is produced.
Going the opposite direction, we deserve to compute the marginal opportunity cost for one much more house. If we were creating 8 software programs and also wanted some housing, us would have to provide up 2 computer programs to acquire 8 houses, relocating from allude E to D. Hence a marginal opportunity expense would be one-fourth of a software regime per house. Together we want an ext houses, the variety of computer programs us would have to sacrifice per home would boost from .25 (E to D) to .33 (D to C), .5 (C come B) and also 1 (B to A). For simplicity, us assume that we have to develop at among the clues A v E. Keep in mind that as we produce more houses the marginal opportunity expenses increases.
While each point on the manufacturing possibilities curve is productively efficient, over there is just one point that is allocatively efficient - the is the mix of goods and also services most desired by society. In a market economic climate that mix is determined by supply and demand. If no one wants a particular good, the producer will find that the or she is far better off making use of the sources to develop something else. Thus, the pricing mechanism signals to producer what consumers want.
Recall the PPC is based on a fixed set of resources and technology. As new resources room discovered, such as brand-new oil shop in Wyoming, we space able come produce an ext as a society. If the quality of the sources improves, we are able to change the PPC outward. A workforce v a bachelors degree would be an ext productive than one with only an elementary education. As a society grows, including immigration, over there are more workers that room able come produce more goods and services.
Technology likewise plays a an essential role in the growth of one economy. As new technologies space developed, sources are freed increase to create other goods and also services. A society that produces capital goods (e.g., machinery) today foregoes the advantage of the customer goods that could have to be produced, however is then able to increase the manufacturing of goods and services in the future because of the machinery and also other enhancements that have actually been made. In 1950, one farmer in the U.S. Fed 15 various other people. Through 1995, the number had increased come 128 and also continues come rise. As technology advances and also farmers use an ext and much more capital, not as many world are compelled to it is in in farming and space able come go produce cars, TVs, and also other goods and also services that us enjoy.
Reference: Agriculture, an innovation and the economy Agriculture, technology and the economic climate Federal Reserve financial institution of Dallas: http://www.dallasfed.org/research/pubs/agtech.html
Biased modern technologies only influence the production of one good. Because that example, the print press permitted for an ext books to be produced, but didn’t boost the variety of wagons (if all resources were committed to wagon production). When both products are gift produced, a biased modern technology reduces the variety of resources being compelled to create that good, so more of the resources deserve to be dedicated to producing the other good.
Graphically, if the economy is at allude A, the development of the printing push would allow the economy to move to suggest B, the same number of books with much more wagons, or allude C, the same variety of wagons with much more books.
Shifts the the manufacturing Possibilities Curve
Inward transition of the production Possibilities Curve
If a culture loses resources, the manufacturing possibilities curve would shift in. The lose of resources may come about from war, organic disasters, such together earthquakes or hurricanes, or disease, such together AIDS.
Movements away from the manufacturing Possibilities Curve
If the sources or technology of a society change, the PPC will change in or out. However, the PPC walk not change when resources are left unused or as soon as they are not offered efficiently. In this latter case, production would merely be shown by a suggest inside the PPC, i.e. Society would be moving away from the PPC to an internal point. For example, boost in the unemployment rate would move a culture further inside the PPC. Keep in mind that the resources still exist for this reason the PPC has not changed, us are just not using all of resources that us have.
Moving towards the manufacturing Possibilities Curve
Conversely, if much more unused sources are offered or the sources are used an ext efficiently (not due to a change in technology), the culture would relocate toward the PPC.
Moving follow me the Productions Possibilities Curve
Movement along the PPC occurs when there is a change in the combination of goods and also services produced. In a market economy, consumers signal to producer the types of goods and also services castle require, desire and are ready to salary for.
Explain just how the manufacturing Possibilities Curve shows scarcity and also opportunity cost. Think of an individual examples the will relocate you away from or twoard the production Possibilities Curve or transition the manufacturing Possibilities Curve (e.g., the 2010 earthquakes in Haiti and also Chile).
Section 04: comparative Advantage
Adam smith taught the prominence of specialization and also trade.
“It is maxim that every prudent grasp of a family, never to attempt to make at residence what will price him an ext to make 보다 to buy. The taylor does no attempt to make his own shoes, but buys them of the shoemaker.”
-- Adam Smith, 1776
When Adam blacksmith spoke that the benefits from trade, he to be referring to individuals specializing in the production of a an excellent or business for i beg your pardon they had an absolute advantage. An individual or country has an absolute advantage in the manufacturing of a good when she/it can develop the good using fewer resources than another. Because that example, assume on one acre of floor Cain can develop 100 lbs of potato or 2 lambs (or some linear combination of the two products), and also Abel can produce 50 lbs of potato or 4 lambs (or part linear combination of the 2 products). Cain would have actually an absolute advantage in potatoes and also Abel in lambs. In this case, Adam Smith would argue over there is a basis for trade that would certainly make castle both far better off. Let"s to speak without trade the brothers use their land come produce half of every product, i.e. Cain to produce 50 lbs the potatoes and 1 lamb; Abel produce 25 lbs the potatoes and also 2 lambs. If they specialize then Cain would create potatoes (100 lbs) and Abel would develop lambs (4). They might then profession say 25 lbs of potatoes for 1 lamb and also both would be far better off (Cain would then have actually 75 lbs that potatoes and also 1 lamb and Abel would have 25 lbs the potatoes and also 3 lambs) - both are better off! yet what if an separation, personal, instance or country has an absolute benefit in many things, would there still be benefit to specializing and also trading?
To view if over there are benefits to trade, also if one individual has actually an absolute advantage, let’s use the instance of an deserted island with just two individuals: Robinson Crusoe and also Friday.
Assume that their diet will consist of fish and coconuts and also that Robinson can capture 4 fish per hour or conference 6 coconuts every hour, when Friday can catch 3 fish per hour or gather 2 coconuts every hour. Keep in mind the Robinson has actually an absolute advantage in both fishing and also coconut gathering. If each person wants 6 fish and 6 coconuts every day, would certainly there it is in an benefit in them specializing and also trading?
If they nothing specialize, exactly how long will it take it each human working alone to meet their day-to-day needs? Robinson would invest an hour and also a fifty percent fishing and also one hour gathering coconuts for a total of 2.5 hours. Friday will spend 2 hrs fishing and also 3 hours gathering coconuts for a total of 5 hours.
If Robinson spent an hour fishing rather of collection coconuts, that would have actually to provide up 6 coconuts to obtain 4 fish, therefore his marginal opportunity expense per added fish is (6 divided by 4) or 1.5 coconuts per fish. If rather he spent an hour collection coconuts, that would offer up 4 fish and also gain 6 coconuts. Robinson’s marginal opportunity cost per coconut would be (4 divided by 6) or two-thirds of a fish. Friday’s marginal opportunity cost of spending an hour fishing instead of gathering coconuts would be 2 coconuts because that 3 fish or two thirds that a coconut per fish. His marginal opportunity price per extr fish would be 3 fish (divided through 2 coconuts) or 1.5 fish per coconut.
To watch if over there are advantages to specializing and also trading, we currently look at the marginal opportunity cost of each. We find that the marginal opportunity price per extr fish is less for Friday compared to Robinson. Friday gives up only 2/3 the a coconut per added fish contrasted to Robinson’s 1.5 coconuts per extr fish. Since Friday has a lower marginal opportunity expense for fishing, that is said to have actually a comparative advantage in fishing. In to compare the marginal opportunity cost for collection coconuts, we discover that Friday’s is 1.5 fish every coconut while Robinson’s is only 2/3 of a fish every coconut. Thus, Robinson is stated to have actually a comparative advantage in coconut collection while Friday has actually a comparative advantage in fishing.
An individual is stated to have actually a comparative advantage if she has reasonably lower marginal opportunity expenses than one more individual. Recall from earlier that marginal opportunity expense is sacrifice divided by gain. Just as individuals have a comparative advantage, nations have comparative advantages based top top what resources they possess. Can comparative advantage (having lower opportunity costs) type the basis because that mutually helpful trade? Yes! when specialization takes location according come comparative advantage, the trading individuals (or countries) will both be better off. The ide of comparative benefit was teach by English economist David Ricardo (1772 – 1823) who discussed that that is comparative advantage that will enable both nations to get from trade.
Specialization and also Trading
Is it advantageous for Robinson Crusoe to specialization in gathering coconuts, even though he deserve to do both fishing and also coconut gathering better than Friday? If they every specialize, what will be the moment savings come each?
If Robinson specialization in gathering coconuts and he must now conference 12 coconuts (6 because that himself and also 6 for Friday), and would should work 2 hours. Friday specializing in fish would must spend 4 hours to gather sufficient fish for himself and also Robinson.
Even though he has an pure advantage, Robinson is able come save half an hour through specializing and also trading. Friday is able to save an hour the time through specializing and also trading. Also though Friday gains much more than Robinson indigenous specializing, each person is better off.
We deserve to represent Robinson Crusoe"s and also Friday"s production abilities utilizing PPCs. Note that since we are assuming that they can switch indigenous fish to coconuts in ~ a continuous rate the the PPCs will certainly be straight rather than bowed external as we saw earlier (i.e. Fairly than raising opportunity costs as we experienced in the PPCs before, they have consistent opportunity costs).
Friday’s calculation per hour is shown by the PPC closest come the origin. He have the right to gather 3 fish every hour or 2 coconuts every hour. Robinson’s PPC is better than Fridays since he has an absolute advantage in developing both goods. If they don’t specialize, their joint manufacturing without specializing is represented by the PPC furthest from the origin.
Specialization allows the joint PPC to shift out also further. If they only produced fish, they could still only create 7 fish every hour, and both collection coconuts would permit them to gather 8 every hour. By Robinson specializing in coconuts and also Friday in fish, they could have 3 coconuts and 6 fish by each functioning an hour. The outward shift shows the gains native specializing and trading.
Terms the Trade
For trade to take place, every individual need to benefit. An individual would not be willing to profession for a good that would price him an ext than that or she might make by themselves. Highest and lowest prices at i beg your pardon the items would profession for are identified by each individual"s marginal chance cost. In ours example, Friday is specializing in fish production and also Robinson in collection coconuts. Because they each want few of both, the terms the trade would have to be acceptable to both. The terms of trade would encompass the rate at which one great would trade for another. In looking in ~ the marginal possibility costs, we see that the regards to trade variety from 2/3 to 1.5. Friday have to receive at least 2/3 that a coconut because that each fish he offers up, and also Robinson would certainly not be willing to pay an ext than 1.5 coconuts for each fish that receives. Somewhere between this range, both people would benefit. Review the following quote by president James E. Faust, paying one-of-a-kind attention come the emphasize sentences.
We live in an er of specialization. When I to be a boy, many human being had design T Fords. Contrasted to modern cars, they were relatively simple mechanically. Many civilization were maybe to fix their own cars by grinding the valves, an altering the ring on the pistons, putting in brand-new brake bands, and also using a generous supply of baling wire. Recently automobiles are so advanced that the average human being knows very little about how to repair them. The mechanics of today use a computer to diagnose engine problems. I mention this instance to encourage girlfriend young males to obtain training and also education in order to save up. Technical education is very important, and also the exact same thing is true in areas of higher education. Any kind of ability requires specialized learning.
- Pres. Faust – Message to my Grandsons, Sat. Priesthood session April 2007.
As Adam smith points out: “What is prudence in the command of every private family, deserve to scarce it is in folly in that of a good kingdom. If a foreign nation can supply us v a commodity cheaper than we can make it, much better buy that of them through some component of the produce of our own industry, employed in a way in i beg your pardon we have some advantage.”
Since the resources of each nation vary, there is a benefit to specializing in a an excellent in i beg your pardon we have a comparative advantage. Although us may have the sources to grow bananas in Idaho, we perform not have actually a comparative benefit in banana production. Thus we specialize in potatoes and other goods and also services because that which we have actually a comparative advantage and profession for bananas and also other tropical fruits from countries that have actually a comparative benefit in producing those goods.
Trade have the right to improve the economic well being of the individuals and often the political relations among the various countries. Us see examples of this in the scriptures, particularly in the publication of Mormon.
And it pertained to pass that the Lamanites did also go whithersoever castle would, even if it is it were among the Lamanites or amongst the Nephites; and also thus they walk have totally free intercourse one v another, to buy and also to sell, and also to get gain, follow to their desire.
and it came to pass that they came to be exceedingly rich, both the Lamanites and the Nephites … (Helaman 6:8-9)
Try come answer the adhering to practice questions.
1. Allan and Ryan live on an island. In one day, Allan can catch 10 fish every day or gather 5 coconuts, in the exact same amount of time, Ryan can record 8 fish or conference 8 coconuts. Does one of two people one have an absolute benefit in either good?
2. Compute the marginal opportunity price for each.
3. Identify who has actually a comparative advantage in every good.
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4. Who need to specialize in i m sorry good?
Since Allan has actually a reduced marginal opportunity cost for fishing contrasted to Ryan, he has a comparative advantage and should specialize in fishing . Ryan has actually a comparative advantage in collection coconuts since he only provides up one fish if Allan must offer up 2 fish every coconut.