Transcript Chapter 3

Introduction to Economics
Division of Labor. Production
Possibilities and Opportunity
cost.
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TM 3-1
Learning Objectives
• Explain the division of labour
• Explain the fundamental economic problem
• Define the production possibility frontier
• Define and calculate opportunity cost
• Explain the conditions in which resources
are used efficiently.
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Learning Objectives (cont.)
• Explain how economic growth expands
production possibilities
• Explain how specialization and trade
expand production possibilities
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Division of Labor: Definition
• is the specialization of cooperative labour
in specific, circumscribed tasks and roles.
Historically an increasingly complex
division of labour is closely associated
with the growth of total output and trade,
the rise of capitalism, and of the
complexity of industrialization processes.
• The specialization supposes cooperation!
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Division of labour :
Natural division of labour:
Men vs. Women ; Mountains vs. Valley Regions;
Social division of labour: from Primitive society to
modern economy – hunting, plant-growing, stockbreeding, craftsmanship, manufacturing, trading,
industrial production.
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Division of labour :
National EconomyA. Division by sectors: agriculture, industry and services
B. Division by branches: shipbuilding, car manufacturing, electronics,
chemical industry, construction industry, textile industry, food
industry, transportation, communications, banking, entertainment, legal
services, education, health care, etc.
C. Inter-company division – horizontal (within the same industry) or
vertical – among companies from different industries.
D. Intra-company division of labour – for instance, BMW – different
departments and divisions of the company produce different goods and
services: components, aggregates, mechanisms, tuning, painting,
assembling, quality control, etc.
E. Intra-departmental division of labour (for instance, professor from the
same department have specialized in teaching of different courses.
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Division of labour :
Global division of labour
In one recent study, Deon Filmer estimated that 2,474
million people participated in the global non-domestic labour
force. Of these, around 15%, or 379 million people, worked in
industry, a third, or 800 million worked in services, and
over 40%, or 1,074 million, in agriculture.
International division of labour : by country, by regions and
organizations (EU, NAFTA, etc.) – oil exporting countries,
food exporting countries, high-tech products exporting
countries, etc.
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Division of labour:
• Sir William Petty was the first modern
writer to take note of division of labour,
showing its existence and usefulness in
Dutch shipyards. Classically the workers in
a shipyard would build ships as units,
finishing one before starting another. But
the Dutch had it organised with several
teams each doing the same tasks for
successive ships.
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Division of labour :
• Adam Smith : In the first sentence of An
Inquiry into the Nature and Causes of the
Wealth of Nations (1776), Adam Smith
foresaw the essence of industrialism by
determining that division of labour
represents a qualitative increase in
productivity. His example was the making
of pins.
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Division of labour :
• Karl Marx
• Increasing the specialisation may also lead
to workers with poorer overall skills and a
lack of enthusiasm for their work. This
viewpoint was extended and refined by Karl
Marx. He described the process as
alienation; workers become more and more
specialised and work repetitious which
eventually leads to complete alienation.
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Division of labour:
K. Marx : wrote that "with this division
of labour", the worker is "depressed
spiritually and physically to the
condition of a machine". He believed
that the fullness of production is
essential to human liberation and
accepted the idea of a strict division of
labour only as a temporary necessary
evil.
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Division of labour :
Marx's
most
important
theoretical
contribution is his sharp distinction between
the social division and the technical or
economic division of labour. That is, some
forms of labour co-operation are due purely
to technical necessity, but others are purely
a result of a social control function related
to a class and status hierarchy.
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Limited Resources
The resources that are used to produce
goods and services are:
• Labor
• Land
• Capital
• Entrepreneurship
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Limited Resources
Labor
The time and effort that we devote to
producing goods and services.
Land
The gifts of nature that we use to produce
goods and services.
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Limited Resources
Capital
The goods we use to produce other goods and
services.
• Includes physical capital
• interstate highways, buildings, and dams
• and human capital
• the knowledge and skill that people obtain from
education and on-the-job training
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Limited Resources
Entrepreneurship
The resource that organizes labor, land, and
capital.
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Unlimited Wants
Our wants are insatiable.
Humans, by nature, would like to have more of
those things they find desirable.
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Resources and Wants
We have limited resources.
We have unlimited wants.
This leads to scarcity.
Scarcity exists when there are insufficient
resources to satisfy people’s wants.
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Economics
Economics is the study of the
choices people make to cope with
scarcity.
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Learning Objectives
• Explain the fundamental economic problem
• Define the production possibility frontier
• Define and calculate opportunity cost
• Explain the conditions in which resources
are used efficiently.
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Resources, Production Possibilities,
and Opportunity Cost
The production possibilities frontier is used
to illustrate the maximum quantity of two
goods that can be produced due to scarcity.
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Production Possibilities Frontier
Possibility
a
b
c
d
e
f
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Tapes
Soda
(millions
(millions of bottles
per month)
0
1
2
3
4
5
per month)
and
and
and
and
and
and
15
14
12
9
5
0
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Production Possibility Frontier
a
15
b
Unattainable
c
10
d
Attainable
5
e
z
f
0
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1
2
3
4
Tapes (millions per month)
5
TM 3-23
Opportunity Costs
Opportunity Cost
All tradeoffs involve a cost -- an
opportunity cost.
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Opportunity Costs
• The opportunity cost of an action is the
highest valued alternative foregone.
• Opportunity costs increase as we desire to
produce more CDs.
• This explains the shape of the PPF -- it is
bowed outward.
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Opportunity Costs
Opportunity Cost Is a Ratio
The decrease in the quantity produced of one
good divided by the increase in the quantity of
another good.
Increasing Opportunity Cost
Opportunity costs tend to increase because not
all resources are equally productive in all
activities.
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Using Resources Efficiently
Marginal cost
The opportunity cost of producing one more
unit of a good or service.
The marginal cost of an additional tape is the
quantity of soda that must be given up to get
one more tape — the opportunity cost.
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Soda (millions of bottles per month)
Opportunity Cost and Marginal Cost
a
15
Increasing
opportunity
cost of CDs...
b
c
10
d
e
5
f
0
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1
2
3
4
CDs (millions per month)
5
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Opportunity Cost and Marginal Cost
MC
Soda (millions of bottles per month)
5
…means increasing
marginal cost of
CDs.
4
3
2
1
0
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1
2 CDs (millions per month)
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Marginal Benefit
Marginal benefit
The benefit that a person receives from
consuming one more unit of a good or
service.
It is measured as the maximum amount that a person is
willing to pay for one more unit.
Decreasing Marginal Benefit
The more we have of any one good or service,
the smaller is our marginal benefit.
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Marginal Benefit
CDs
Willingness to Pay
(millions per month)
(bottles per CD)
a
0.5
5
b
1.5
4
c
2.5
3
d
3.5
2
e
4.5
1
Possibility
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Soda (millions of bottles per month)
Marginal Benefit
5
Decreasing
marginal
benefit from CDs.
4
3
2
1
MB
0
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1
2
3
4
5
CDs (millions per month)
TM 3-32
Learning Objectives
• Explain the fundamental economic problem
• Define the production possibility frontier
• Define and calculate opportunity cost
• Explain the conditions in which resources
are used efficiently.
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Efficient Use of Resources
Efficiency
• Implies that we cannot produce any more of
any good without giving up something that we
value even more highly.
• We compare the marginal cost to the marginal
benefit.
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Efficient Use of Resources
• If the marginal benefit of the last unit of a
good exceeds its marginal cost, we increase
production of that good.
• If the marginal cost of the last unit of a
good exceeds its marginal benefit, we
decrease production of that good.
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Efficient Use of Resources
Bottles of soda
that people are
willing to forgo
Marginal cost and willingness to pay
(bottles of soda per CD)
5
Bottles of soda
MC
that people
must forgo
4
3
Benefit
exceeds
cost
2
Cost
exceeds
benefit
MB
1
0
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1.5
2.5
3.5
CDs (millions per month)
5
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Economic Growth
Economic growth is illustrated by an
economy’s expansion in production over
time.
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Economic Growth
The Cost of Economic Growth
• The development of new goods and better ways
of producing goods and services is
technological change.
• The growth of capital resources is capital
accumulation.
Does economic growth allow us to avoid
opportunity costs?
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CD -making machines (per month)
Economic Growth
10
c
8
b
6
If we produce 6
machines a month
(b), then the PPF
rotates. We will be
able to produce more
CDs in the future.
b'
4
2
1
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2
3
4
PPF0
PPF1
a
a'
5
6
7
CDs (millions per month)
TM 3-39
Gains from Trade
Comparative Advantage
A person or nation has a comparative
advantage in an activity if they/it can perform
an activity at a lower opportunity cost than
others.
Why is there a difference?
•
Differences in abilities
•
Differences in resource characteristics
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Comparative Advantage
Tom’s Factory
• Can produce 4,000 CDs/hour or
• Can produce 1,333 cases/hour
Opportunity Cost
• To produce 1 case, he must decrease CD
production by 3 CDs — opportunity cost.
• To produce 1 CD, he must decrease case
production by 0.333 case — opportunity cost.
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Comparative Advantage
Nancy’s Factory
• Can produce 1,333 CD/hour or
• Can produce 4,000 cases/hour
Opportunity Cost
• To produce 1 case, she must decrease CD
production by 0.333 — opportunity cost.
• To produce 1 CD, she must decrease case
production by 3 cases — opportunity cost.
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Cases (thousands per hour)
Comparative Advantage
5
Tom’s opportunity cost:
1 CD costs 1/3 case,
and 1 case costs 3 CDs
4 b'
Nancy’s opportunity cost:
1 CD costs 3 cases,
and 1 case costs 1/3 CD
3
2
1
Trade line
a
Tom’s
PPF
b
1
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c
Nancy’s
PPF
2
3
4
CD (thousands of lengths per hour)
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Absolute Advantage
• An absolute advantage exists when a person
or nation can produce more of a good than
another.
• Individuals and nations can have absolute
advantages in any or all goods.
• However, it is not possible to have a
comparative advantage in everything.
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Dynamic Comparative
Advantage
• People or nations can become more
productive simply by repetition --learningby-doing.
• Dynamic Comparative Advantage results
from learning-by-doing.
• Examples: China, South Korea, Taiwan,
Singapore, Mexico, Poland, Czech
Republic
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