ONE
l0 IPART
I Introduction to Economics and the Economy
Income Changes The locationof the budsetline
u:i.r yt! moneyincome.An increase
in moneylncome
shiftsthe b-udget
line to
right;
a
decrease
in money
-the
incomeshiftsit to the left. To verifi,this,recalculate
the.
tablein Figure 1.1,assuming
the cardvalue(income)is
\fllil
Budget lines
(a) $Z+Oand (b) $60, and plot the new budget lines in the graph.No wonder people
like to havemore income:That shiftstheir
budget lines ourward and enablesthem to
buy more goods and services.But even
with more income, people will still face
spendingtradeoffs,choices,and opporrunity costs.(Key Question 7)
Because
wantsexceedincomes,individualsfacean
economizingproblem;tJreymust decidewhat ro buy and
what to forgo.
A budgetline (budgetconstraint)showsthe various
combinationsof two goodsthat a consumercanDurchase
with a specificmoneyincorne
Straighclinebudgetconsrrainrsimply constantopporruniry
costsassociated
with obtainingmore of either of ihe rwo
goods.
Society'sEconomizing problem
Societymust alsomake choicesunder conditionsof scar_
ciry. It, roo, faces an economizing problem. Should it
devotemore of its limired r"ro,rr".Jto the criminal
iustice
system (police, courts, and prisons) or to education
(teachers,bools, and schools)?If it decidesro devoremore
resourcesto both, what other goods and servicesdoesit
forgo?Health care?Energy development?
Scarce Resources
Societyhaslimited or scarceeconomic resources,mean_
ing all natural, human, and manufacturedresourcesthat
go into the production of goods and services.This in_
cludesthe entire set of factory and farm buildings and
all
the e_quipment,tools, and machinery used to"produce
manufacruredgoods and agricultural products;,il trrrrr_
portation and communication facilitiei; all
rypes of labor;
and land and mineral rcsources"
ResourceCategories
Economistsclassi$reconomicresourcesinto four
seneral
categories.
Land Land meansmuch more to the economistthan it
does to most people.To the economisrland includesall
narural resources("gifi* of nature") usedin the production
process,such as arableland, forests,mineral and oil de_
posits,and water resources.
Labor
_Theresourcelabor consisrsof the physicaland
mental talentsof individualsusedin producing goodsand
services.The servicesof a logger, retail clerk, inachinist,
t9_agher,
professionalfootball player,and nuclearphysicisi
all fall under the generalheading,,labor.,'
Capital
For economists,capital (or capitalgoods)includesall manufacturedaidsusedin producing'Tnsumer
goodsand services.Included are all factory srorage,trans_
portation, and distribution facilities,as well as iools and
machinery.Economists refer to the purchaseof capital
goods asinvestrnent.
Capital goods differ from consumer goods because
consumergoods satisfizwants directly, wlereas capital
goods do so indirectly by aiding the production of consumer goods.Note that the term ,,capital',as used by
economistsrefers not to money but to tools, machinery
and other productiveequipment.Becausemoneyproduces
nothing, economistsdo not include it as an econtmic re_
source.Money (or money capital or flnancial capital) is
simply a meanslbr purchasingcapitalgoods.
Entrepreneurial Ability
Finally,
thereisthespe-
cial hurnanresource,distinct fiom labor,calledentrepre_
neurial ability. The entrepreneur performs .several
runctlons:
. The entrepreneurtakesthe initiative
in conrbinins
the resourcesof land, labor, and capitalto producJ a
good or a service.Both a sparkplugand a catalyst,
the entrepreneuris the driving force behind pioduc_
tion and the agentwho combinesthe other ,.rorrr_
cesin what is hoped will be a successfulbusiness
venrure.
* The entrepreneurmakesthe strategic
business
decisionsttrat set the courseof an e-nterprise.
" The entrepreneuris an innovator. He or she com_
mercializesnew products,new productiontechniques,
or evennew forms of businessorganization.
The
entrepreneuris a risk bearer.The entrepreneur
"
hasno guaranteeof profit. The reward for the entre_
preneur'stime, efforb, and abilitiesmay be profits or
losses.The entrepreneurrisksnot only his o. h.,
investedfundsbut thoseof associates
and stockhold_
ers aswell.
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r
cHArrER
I 1r
andChoicesI
Limits,Alternatives,
abilland,labor,capital,andentrepreneurial
Because
theyare
ity arecombinedto producegoodsandservices,
calledthe factors of production' or simply"inputs."
Production PossibilitiesNlodel
Societyusesits scarceresourcesto produce goods and
services.The alternativesand choicesit facescan best be
understoodthrough a macroeconomicmodel of production possibilities.To keep things simple, let's initially
assume:
. Full ernploymenr The economy is employing all its
availableresources.
. Fixed resoarcesThe quantity and quality of the factors of production are fixed.
. Fixed technolog The state of technology (the methods usedto produce output) is constant.
' Two goods The economy is producing only two
goodsr pizzasand industrial robots' Pizzassyrnbolize
consumer goods, products that satis$tour wants directly; industrial robots (for example,the kind used
to weld automobile frames)symbolizecapital goods,
products that satisfitour wants indirecdy by making
possiblemore efficient production of consumer
goods.
consumergoodssatisftour wantsdirectlg
Because
any movementtowardE lookstempting.In producing
of
the currentsatisfaction
morepizzas,societyincreases
its wants.But there is a cost: More pizzasmeansfewer
industrialrobots.This shift of resourcesto consumer
goodscatchesup with societyover time becausethe
stock of capitalgoodsdoesnot expandat the current
rate,with the resultthat somepotentialfor greaterfuture productionis lost. By moving toward alternativeE,
societychooses"more now" at the expenseof "much
morelater."
to forgo current
By movingtowardA, societychooses
that can be
consumption,therebyfreeingup resources
theproductionof capitalgoods.By buildusedto increase
ing up its stockof capitalthisway,societywill havegreater
futureproductionand,therefore,greaterfutureconsumption. By movingtowardA, societyis choosing"morelater"
at the cost of
ttlessnow.tt
Generalization:At any point in time, a fully employed
economy must sacrificesome of one good to obtain more
of another good. Scarceresourcesprohibit such an economy from having more of both goods.Societymust choose
among alternatives.There is no such thing asa free pizza,
or a free industrial robot.
Production PossibilitiesCurve
Production PossibilitiesThble
The data presentedin a production possibilities table are
shown graphically as a production possibilities qrrve.
Such a curve displaysthe different combinations of goods
and servicesthat society can produce in
a fully employed economy, assuming a
fixed availability of suppliesof resources
and constant technology. We arbitrarily
represent the economy'soutput of capital
goods (here, industrial robots) on the
9 ! : 1 vertical axis and the output of consumer
Production
(rere, pizzas)on the horizontal axis,
possibilities
curve goods
as shown in Figure 1.2 (Key Graph).
Each point on the production possibilitiescurve representssome maximum ouput of the two products' The
curve is a "constraint" becauseit shows the limit of attainable outputs. Points on the curve are attainable as
long as the economy uses all its available resources.
Points lying inside the curve are also attainable, but they
reflect lesstotal output and therefore are not asdesirable
aspoints on the curve. Points inside dre curve imply that
.
the economy could have more of both industrial robots
andpizzasif it achievedfull employment of its resources.
Points lying beyond the production possibilities curve,
like W, would represent a greater output than the output
A production possibilitiestable lists the different combinations of two products that can be producedwith a specific set of resources,assumingfull employment. Table
1.1 presentsa simple,hypotheticaleconomythat is producing pizzasand industrial robots; the data are, of
course, hypothetical. At alternative A, this economy
would be devoting all its availableresourcesto the production of industrial robots (capitalgoods);at alternative \ all resourceswould go to pizza production
(consurirergoods).Those alternativesare unrealistic extremes; an economy rypically produces both capital
goods and consumergoods, as in B, C, and D. As we
move from alternative A to E, we increasethe production of pizzasat the expenseof the production of industrial robots.
TABLE
Robots
l. I Production Possibilities of Pizzas and Industrial
"
""'"
',,
-
l F-ir.iriillternatlvis
, t A l r , . .r i' ; B ; 1, ; , Q r, r b
3
|
2
0
(in hundredthousands)
Pizzas
4
7
l0
9
Robots(in thousands)
T y p e o f P r t d u c t " , , , , , ,,;;,
E
4
0
-)
-{n"
Fl GUfiE | .l The produstion poecibilifiicr curv6. Fachpoint on the
productionpocrhilhisscurvoraFossntsssmemadmrrmcombination
of gro produststtct
canbepnoducad
m eaonomy
b opcratingon the
if ruourtes arcfullyemployed.\Aften
curve,thorcindustrlrlrobo* mernslerspizzas,
rnd vicevcrea"
Limhedrcsources
ald a fixed
t$hnotogymakeanyconrbinrdooof industrialrpbotsandphraslyiry ou$id. rhacurs
(suchrs at W) unatoinable.
fuints insideth€ curyearr atdlnabh,buttheylndlcated|at fult
employrnent
is no! belngrtalized.
I ,4 5 6 7
(hunftedthousands)
Pizzas
\'