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Chapter Two-- Resource Utilization

  1. Economics Defined
    1. Economics is the efficient allocation of the scarce means of production toward the satisfaction of human wants.
      1. Let's dissect that statement
      2. Efficient: without waste
      3. Allocation: dividing up; distributing
      4. Scarce: limited
      5. Means of Production: our resources-- land, labor, capital, and knowledge.


    2. Is there one and only one right way to allocate our resources-- or, if you will, economize?
      1. Absolutely not. Distribution of our resources is linked to the values of individuals and groups.
        1. Some would prefer to more aggressively harvest our forests, mine our lands, and drill for oil, ; others prefer the preservation of natural resources to the exclusion of "economic" development.
        2. Our resources are limited, but our wants are unlimited.
      2. Who's right? There seems to be no clear cut answer, short of compromise.


  2. The Central Fact of Economics: Scarcity
    1. Scarcity and the Need to Economize
      1. If there were no scarcity, none of us would need to economize.
      2. Solution to scarcity: just print more money!
      3. Keynes pointed out earlier in this century that this is a foolish notion.
      4. Our wealth as a nation is not in the paper we call money.
      5. It is in the goods and services we produce when we efficiently use our resources: land, labor, capital, and entrepreneurial ability.
      6. Land
        1. General term used in economics to refer to all natural resources,
          1. such as timber, oil, coal, iron ore, soil, and clean water and air.
          2. one of our economic choices we must make is whether or not we should exploit these resources, and to what degree.
      7. Labor
        1. Any human effort in a productive process is considered to be labor.
        2. By the way, management, in our discussion, is also considered to be labor.
      8. Capital
        1. Facilities, Factories, Machinery, Equipment, and the dollars that will be converted into these are all examples of capital.
        2. Capital assets are those goods that are used to produce other (consumer) goods and services.


          1. a factory building and its machinery and equipment are capital assets which produce consumer goods.
      1. Entrepreneurial ability
        1. This ingredient is the magic that ties it all together.
        2. People who are entrepreneurs
          1. employ their knowledge
          2. risk their money and time
          3. take land, labor, and capital, and make or do things that satisfy human wants.
          4. Without the entrepreneur, there is no kinetic energy-- just potential energy; there is no production.
          5. Entrepreneurs are scarce, too. It takes a special kind of person to be a successful entrepreneur.


    1. Economics involves the notion of "trade-offs."
      1. You can't have your cake, and eat it, too.
      2. You can't strip mine without destroying the landscape.
      3. You can't build a huge metropolis without having air pollution.
        1. If you have "progress," you can't have clean air & water.
        2. If you choose to preserve nature, you can't have cities.
        3. Whatever you choose, you're giving something up-- it's costing you something.
        4. These "costs" of the next best alternative are called opportunity costs.


    2. Opportunity Costs
      1. Example: A municipality may have to decide if it will budget for additional road repairs or hire extra police in the next year.
      2. If it hires extra police, the opportunity cost is the additional road repairs that it foregoes, and visa-versa.
      3. Here's another example of allocation of scarce dollars and the resulting opportunity costs:
        1. Among its biggest expenditures, the state of California pumps millions into its prison system and its system of state funded universities.
        2. Between 1967 and 1997, California built one new university and 21 prisons!
        3. In the nineties, California universities laid off 10,000 employees, while California prisons hired 10,000 new prison employees.
        4. So, what's the opportunity cost of hiring 10,000 more prison guards? Answer: foregoing the hiring of 10,000 university employees.
      4. What's the lesson? If we are using our resources efficiently, the more we produce of one thing, the less we can produce of something else.


  1. Full Employment and Full Production
    1. Most agree that "full employment" is a good thing-- but not all.


    2. Does full employment = zero unemployment?
      1. No. That's not possible. There will always be people who are "between jobs."
      2. So what is full employment?


    3. As usual, economists can't agree.
      1. Some believe it is 6% unemployment
      2. Others believe it is 4% unemployment.
      3. Our author takes a courageous stance and declares full employment to be 5%!
      4. Just this past weekend (early December, 1999) new Labor Department figures pegged our nation's unemployment at 4.1%.


    4. Similarly, when our nation's factories are said to be running at "full capacity," they are really running at about 85% capacity.
      1. Again, there will always be some repair and renovation of factories going on somewhere. So, not all machinery is in use.
      2. Also, much of our nation's productive capacity is idle on Saturdays, Sundays, and holidays.
      3. Much idleness in productive capacity also occurs after 5pm each weekday.
      4. If we really wanted to we could keep all those machines humming 24/7.


    5. Given our limitations of what we consider to be full employment and production, as long as we are using all of our resources efficiently, we are at our production possibilities frontier.
      1. Remember that our resources are land, labor, capital, and entrepreneurial talent.
    6. Employment discrimination (by race and gender, for example) creates inefficiency because the best people for the job may be under utilized, or not utilized at all!
      1. To this day, remnants of such discrimination still exist, i.e. the glass ceiling.
      2. Although (I believe) we are becoming a more "enlightened" people and such barriers are (thankfully) disappearing.
    7. Efficient use of our resources includes the application of our technological advances.
      1. The U.S. used to be the world's leader in its ability to find practical solutions to its problems using its technologies.
      2. In the latter half of the 20th century, we have been yielding to countries like Japan and Germany-- even though we have invented most of the new technology!
      3. One theory (mine) is our impatience and lack of funding to research and develop our own ideas.


        1. Many investors are looking for the quick buck, not willing, nor able, to have any sort of vision.
        2. The Japanese and German governments realize the value of funding the applied sciences, therefore, more develops.


    1. Working at our production possibilities frontier means that we are at full production and full employment.
      1. How we allocate our resources (land, labor, capital, and entrepreneurial ability) AND what we choose to produce with them is our economic choice.
      2. Economists use this grossly over-simplified example to demonstrate our production possibilities:
        1. Suppose a country had the choice of two types of output: guns and/or butter.
        2. Guns represent military spending; Butter means economic development spending and social programs for its people.
        3. A country could make all guns and no butter, or various combinations of both. (see the graph and table on page 32)
        4. If it decided to make 15 units of butter, it could make no units of guns.
        5. Likewise, if the country decided to make 5 units of guns, it could make no butter.
      3. You could say that the former Soviet Union spent more on "guns" than it did on "butter."
      4. Also, Japan spends virtually all its resources on "butter," and very little on "guns."
      5. America is kind of in between. We a spend a portion on "butter," and what's left on "guns."
        1. Yeah, to protect Japan so they can make more butter! Go figure.


    2. We seldom operate on the production possibilities curve.
      1. As long as we are not producing to capacity or have less than full employment, we operate inside the curve.
        1. See points X, Y, and Z on page 33.
      2. We are probably at point X at the moment.
      3. Point Y represents the economy during a recession.
      4. Point Z represents the economy during a depression.
      5. Keep in mind that as long as we are on the curve, the only way to produce more of one thing is to produce less of the other.
      6. Also note that given the nation's available resources, operating at point W is not possible.
        1. Unless new technologies enable more efficiency!


  1. Economic Growth
    1. As the level of available technology improves, the production possibilities curve expands outward.
    2. More guns AND more butter are now possible.


    3. Just like President Reagan said, "Don't fight over how to divide the pie, just make a BIGGER PIE!"


    4. Faster computers, more skilled workers, and more investment dollars available promote economic growth.
      1. Note PPC1 through PPC3 on page 35.


    5. Beginning in the 1970s, our annual economic growth has slowed to about 2% per year, whereas it had historically been about 3% per year.


    6. Running trade deficits every year has contributed to the slower growth.
      1. We Americans are consuming more than we are producing.
      2. Our imports are fueling growth in foreign businesses, not our own.


    7. Our ever growing propensity to spend, rather than save, has forced U.S. businesses to look abroad for investment dollars.
      1. Arguably, we may be turning over the keys to our economy to global interests.