University:
California State University, Northridge
Course:
ECON 500 | Survey of Economics
Academic year:

2024
Views:

136

Pages:

12
Author:

Janiya Drake

1 The Fundamental Economic Problem: Scarcity and Choice Part 2 Three Coordination Tasks of Any Economy 1. How to utilize resources efficiently –get on the boundary of the PPF 2. What combinations of goods to produce – which point on the PPF 3. How much of each good to distribute to each person –who gets what ♦ Goals can be accomplished by a central planner or a price system Efficiency in Production ● Division of Labor: each person specializes in the production of a particular good or task ● Adam Smith in Wealth of Nations (1776) describes specialization in a pin factory: ♦ “One man draws out the wire, another straightens it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires 2 or 3 distinct operations; to whiten the pins is another; it is even a trade by itself to put them into the paper.” Efficiency in Production ● Smith observed that this division of labor increased the productivity of the workers as a whole stating: ■“I have seen a manufacturing plant where 10 men were employed. Those 10 men could make among them upwards of 48,000 pins a day. But if they had all worked separately and independently, they certainly could not each of them have made 20, perhaps not 1 pin in a day.” Efficiency in Production ● Imagine a world without specialization ♦ You would have to produce all of your own clothing, food, shelter, and transportation. ● So what should you specialize in? ■Doing what you do best and trading with others Efficiency in Production ● Example: a world-class neurosurgeon is the best car mechanic in Los Angeles. ♦ Should she repair her own car? ♦ What is the opportunity cost of having her spend one hour repairing her car? Comparative Advantage ● Principle of comparative advantage is illustrated here. ● Neurosurgeon specializes in surgery despite her advantage as a car mechanic because she has an even greater advantage as a surgeon. ● She suffers some loss by letting a lesser skilled mechanic repair her car. Yet, she makes up for that loss by the income gained from surgery. Comparative Advantage ● Comparative advantage applies to countries. ● Standard of living in the U.S. would be lower if it tried to produce everything itself. ♦ Example: U.S. could produce winter roses and computer software. ♦ U.S. is better off specializing in software and buying winter roses from Latin America where the opportunity cost of roses is lower. Voluntary Exchange ● Specialization leads to exchange ♦ Prior to industrial revolution, workers produced what they consumed. After, workers who produced shoes needed to trade with others who produced food or clothing. ● Voluntary exchange between 2 parties must make both parties better off. ♦ Even though no additional goods are created in the act of trading, welfare of society is improved. Individuals can trade what they have for what they want. Voluntary Exchange ● Why don’t we trade goods for goods? Why do we need money? ■ Search costs ● Recall: focus is efficiency in production. Sidetracked: division of labor and specialization → comparative advantage → exchange ● Firms are also encouraged by the profit motive not to waste inputs → efficiency in production Production Decisions ● Task (2) –which point on the PPF –is accomplished by the forces of S and D. ♦ Example: if consumers want more fuelefficient cars, automakers must produce smaller, more efficient cars. Distribution of Goods ● Task (3) –who gets what –is accomplished by consumers purchasing what they like best given their income. ● Ability to purchase goods is not equally distributed. ♦ Highly skilled workers and individuals who own valuable resources can sell their labor or resources at high prices giving them greater incomes. ● Should we redistribute income so that everyone can consume the same amount of goods and services?