Adrienne Pacini ECON 208 WEEK: September 8, 2009
Production Possibilities Boundary
- A point on the boundary indicates that all resources are being used
- A point inside the boundary indicates unemployment (all resources not used)
- A point outside the boundary is not attainable
- Marginal decisions: choice is based on these decisions
- Unequal adaptability of resources (specialization in goods and services that have a
Four Key Economic Problems
1. What is produced and how?
- Resource allocation (quantities produced)
- Will the economy be inside the limits of the production possibilities boundary?
2. What is consumed and by whom?
- What determines how economies distribute total output?
- Will we produce what we will consume?
3. Why are resources sometimes idle?
4. Is our productive capacity growing?
- Participation rate (specifically women after WWII)
- Growth in productivity per worker
- Increase in recent years due to flexible manufacturing, outsourcing, and lean production
- Income equality maintained by tax progression and transfer payments
The Complexity of Production
- Specialization: more efficient (individual abilities differ)
o Comparative advantage
o Allocation of jobs to different people
o Focusing on one activity (learning by doing)
- Job structure:
o More people working in the service industry
o As average income grows, a higher proportion is spent on services
- New technology and products:
o Improves living standards
o Trying to decrease carbon footprint
- Globalization: rapid reduction of transportation and communication costs
- Lower tariffs (eliminating trade barriers)
- TNCs are more common
- Specialization must be accompanied by trade
The Great Debate
- Karl Marx: a free-market would maximize output but wouldn’t ensure equal distribution
- Free-market economies couldn’t be relied upon to generate a “just” distribution of output
- Marx argued the benefits of a centrally-planned economy
o However, these countries could not keep up with the standard of living of other
- The failure of central planning shows the superiority of mixed economies