chapte2 - Chapter 2: Production Possibilities Curve,...

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Chapter 2: Production Possibilities Curve, Scarcity, and Development I. A Market System and Basic Economic Questions 1. In a decentralized (Capitalist) society, “markets” are required. This market system is a means of buyer–seller exchange, and does not need a physical location. The idea that self–interested market participants will make everyone better off was called ”an invisible hand” by Adam Smith, and creates the invisible hand argument that is used in the same way today. 2. The buyer–seller exchange in a free market economy is a positive–sum game (both sides are “winners”) as opposed to a zero–sum game (winner and a loser, whose utility changes net to zero - canceling each other out). 3. Due to scarcity, all decisions involve trade–offs. Governments, like other participants in an economy choose among alternatives involving spending, taxes, and the degree and types of regulations. Economies can be analyzed for what is produced, how production occurs, and who consumes the output. How any one of these fundamental questions is answered will influence the others. A. What shall be produced? i. The PPC is a tool for viewing this question graphically. ii. What division of goods and services will the society produce? a. Within the goods category, what will be the division and composition of agricultural and manufacturing production? B. How shall it be produced? i. Very broadly, is there a market or control–economy? If market, are there large producers, who have some degree of monopoly power, or purely competitive and homogenous small producers. ii. More specifically, is the production process capital– or labor–intensive? What degree, type, and prevalence of technology is used? C. Who consumes the output? i. A distributive question in that it is based on the distribution of wealth in a society, the types of goods produced and method of production (i.e. the first two questions) interrelate with this question of consumption. a. If a society has a massive poor class and a wealthy minority, it may find a high degree of “luxury goods” being consumed by the upperclass in some sort of balance with “necessity goods” consumed by the poor. b. A society with a large middleclass will consume necessity goods but have a wider choice and various quality advantages over the poor in both their country and the poor majority in the other example. This middleclass will also consume their share of frivolous “wants” as opposed to “needs” although the very
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expensive luxury goods will continue to be consumed primarily by the wealthiest members of the population. II. A. Production Possibilities Curve 1. We begin with a simplification of economic reality, one that imagines an economy creating only two goods. In the book an example is given of a society that has to choose which combination of beef and all–purpose machines to produce. Actually this is a very flexible type of analysis because it could consider two broad categories of production,
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chapte2 - Chapter 2: Production Possibilities Curve,...

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