4Lecture

4Lecture - LECTURE 4 Today is Wednesday September 2 2009...

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Unformatted text preview: LECTURE 4 Today is Wednesday, September 2, 2009. PRODUCTION POSSIBILITY CURVES In Lecture 3, we created a production possibility curve for Sonny’s cotton farm. The model demonstrated that, given fixed resources at a point in time, there are limits as to what we can produce, and we must somehow make a choice. We can extend the Sonny’s cotton-corn model to examine the entire U.S. economy. Refer to Figure 4-1. Figure 4-1 represents a production possibility curve for the entire U.S. economy. The assumptions are that, at this instant, producers in the United States are faced with limited resources. There are only a fixed number of acres of land available to producers in the U.S. at this point in time. The number is quite large, but it is still fixed. And trust me, for every privately owned acre of land out there in the big old U.S., someone holds a deed to it and is very protective of its use, especially if it is really scarce land that commands a high price. Likewise, at this time, there are fixed amounts of labor and capital available to producers. Of course, next year, next month, and even next week we could obtain more land, labor, and capital. The amounts couldn’t increase much in a day or a week for labor and capital, and the total amount of land would take much longer to increase. That is why economists like to talk about year-to-year changes (and sometimes quarter- to-quarter) 1 changes in the macro-economy. In one sense, production possibility curves are limiting, in that we only have two axes that we can label with things like cotton and corn. But they aren’t that limiting, and are excellent for demonstrating important economic principles. 2 Figure 4-1 divides the economy into two types of economic goods, manufacturing output (which includes manufactured goods of all types and all non-agricultural services), and agricultural output (which includes farming, livestock, timber, mineral extraction, and all services related to these types of production processes.) 1 A “quarter” in economics refers to a quarter of a year: three months. Economists, financiers, and accountants are always talking about the “third quarter” results, or the “fourth quarter” results, and so on. 2 Note that we could put cotton on one axis, and all other things that we could produce on the other axis, and the model would work just as well for our purposes. Since we can’t mix apples and oranges on an axis, when we start aggregating, as in “all other goods”, we have to talk about dollars worth of other goods , rather than bushels and bales. Again, this doesn’t alter the results. If we used all of the productive resources in the U.S. to produce manufacturing output, the model assumes that we could produce $11 trillion worth of manufacturing output. This is shown as point A. If we used all of our resources to produce agricultural output, we could be at point B, producing $8 trillion worth of goods and services. (The numbers indicate that we have a comparative advantage...
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This note was uploaded on 09/03/2009 for the course ECN ecn 211 taught by Professor Stevehappel during the Fall '06 term at ASU.

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4Lecture - LECTURE 4 Today is Wednesday September 2 2009...

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