ANNOUNCEMENT

THE UVLE ALREADY HAS THE FOUR LECTURES INCLUDING THIS ONE UPLOADED IN IT. MEMBERS OF THE CLASS ARE ENJOINED TO ACCESS THE SITE. ONCE IN UVLE, LOOK FOR THE ECONOMICS 11 COURSE OUR CLASS.

LECTURE #4: ECONOMIC GROWTH; THREE FUNDAMENTAL ECONOMIC LAWS

FROM LAST LECTURE TECHNOLOGICAL CHANGE PRODUCTION POSSIBILITY FRONTIER SOME PRINCIPLES OF ECONOMIC GROWTH INTRODUCTION: THREE FUNDAMENTAL LAWS OF ECONOMICS
Nov. 19, 2010 Lecture #4 2

CLOTHING
THE PRODUCTION FRONTIER

b c

The Production Possibility Frontier is the curved line FOOD traced by points a, b, c, d, e at full employment. Any point inside the schedule is possible, but resources are not fully employed.
Nov. 19, 2010 Lecture #4 3

GROWTH OF PPF OVER TIME (#1) A countrys production possibility frontier can expand (or grow) over time. This means either improving technology and growth in the resources used in production.

CLOTHING
THE PRODUCTION FRONTIER (D)

0 FOOD FOOD PRODUCTION BECOMES TWICE MORE PRODUCTIVE. PPF SCHEDULE SHIFTS Lecture OUTWARD. MORE POINTS 5 Nov. 19, 2010 #4 OUTSIDE OF OLD PPF ARE NOW POSSIBLE.

GROWTH OF PPF OVER TIME THEREFORE MEANS EXPANSION OF PRODUCTIVE CAPACITY

BUT SUPPOSE THE PPF SHIFTS INWARD? (#2)

It means the PPF or productive capacity declines. This could arise from:
oDecline of resources (labor and capital, etc.) or inputs arising from MAJOR DESTRUCTIVE events

BUT SUPPOSE THE PPF SHIFTS INWARD? (#2)

Decline of inputscan be due to
oNatural disasters oWars oReduction of investments oReduction of labor through migration oLoss of land territory

GROWTH OF PPF OVER TIME: EXAMPLES (#3) Example #1: Balanced growth Example #2: Unbalanced growth Example #3: Effects of thrift and investment on growth

INDUSTRY

INDUSTRY

c10

c30

0 AGRICULTURE AGRICULTURE

2010
A 2010 COUNTRYS Nov. 19,

2030 20 years later

PRODUCTION POSSIBILITY FRONTIER, Lecture #4 2010 and 2030
10

INDUSTRY

INDUSTRY

c10

c30

0 AGRICULTURE AGRICULTURE

2010
A 2010 COUNTRYS Nov. 19,

2030 20 years later

PRODUCTION POSSIBILITY FRONTIER, Lecture #4 2010 and 2030
11

INDUSTRY

EXAMPLE #1:

BALANCED GROWTH
c30

c10

2030 2010

0
Nov. 19, 2010 Lecture #4

AGRICULTURE
12

INDUSTRY

EXAMPLE #1:

BALANCED GROWTH
c30

c10

2030 2010

AGRICULTURE

Nov. 19, 2010 and Agriculture Lecture #4 in the same proportion. 13 Industry grow

INDUSTRY

EXAMPLE #2: c30

UNBALANCED GROWTH

c10

2030

2010

Nov. 19, 2010

Lecture #4

AGRICULTURE

14

INDUSTRY

EXAMPLE #2: c30

UNBALANCED GROWTH
Industry grows faster than Agriculture Proportions vary as broken rays show.

c10

2030

2010

Nov. 19, 2010

Lecture #4

AGRICULTURE

15

EXAMPLE #3: THRIFT VS. HIGH CONSUMPTION

Being thrifty means saving in the present rather than consuming (satisfying immediate wants). A thrifty nation saves and undertakes investments more in the present. The reward is a higher production possibility frontier in the future.
Nov. 19, 2010 Lecture #4 16

CONSUMPTION

CONSUMPTION

c30 C c10

I INVESTMENT

Waldas: High living country

Nov. 19, 2010

Masinop: Thrifty country

I INVESTMENT

Lecture #4

17

HIGH LIFE VS. THRIFTY LIFE: WHO WINS LATER

CONSUMPTION

CONSUMPTION

c30

2030
C c10

c30

2030
c10

I INVESTMENT

Waldas: High living country

Nov. 19, 2010

Masinop: Thrifty country

INVESTMENT

Lecture #4

18

EXAMPLE #3: MASINOP WINS

EXAMPLE #3: THRIFT VS. HIGH CONSUMPTION

The nation that invests more of its current output rather than consume it has a higher PPF later in time. Consumption (in 2030) for Masinop (high saving country) is much higher than that of Waldas (the high consuming country). Diagrammatically, the PPF is much farther out.
Nov. 19, 2010 Lecture #4

19

PHILIPPINE LONG TERM GROWTH PERFORMANCE

Compared to our immediate neighbors, Philippine economic growth has lagged behind between the 1950s to the present (2000s). Let us view the Philippine PPF compared to those of other countries (Taiwan, South Korea, Hong Kong, Singapore) in a stylistic fashion. Assume that the PPF is on an Output Per Head basis so that big and small countries can be easily compared on a per population basis.
Nov. 19, 2010 Lecture #4 20

INDUSTRY PER HEAD

INDUSTRY PER HEAD

OUTPUT PER HEAD OUTPUT PER HEAD

AGRICULTURE PER HEAD

AGRICULTURE PER HEAD

PHILIPPINES, 1950s
Nov. 19, 2010 Lecture #4

PHILIPPINES, 2000s
21

PRODUCTION POSSIBILITY FRONTIER, HALF CENTURY

INDUSTRY PER HEAD INDUSTRY PER HEAD OUTPUT PER HEAD

OUTPUT PER HEAD

AGRICULTURE PER HEAD

AGRICULTURE PER HEAD

1950s

2000s
22

PRODUCTION POSSIBILITYLecture FRONTIER, HALF CENTURY: Nov. 19, 2010 #4 TAIWAN, SOUTH KOREA, HONG KONG, SINGAPORE

INDUSTRY PER HEAD NOTE: SCALE OF PPFs CORRESPOND TO SIZE OF PER CAPITA OUTPUT

OUTPUT PER HEAD

INDUSTRY PER HEAD

OUTPUT PER HEAD

AGRICULTURE PER HEAD

AGRICULTURE PER HEAD

PHILIPPINES, 2000s

ASIAN NEIGHBORS, 2000s

PRODUCTION POSSIBILITY FRONTIER, HALF CENTURY: TAIWAN, Nov. 19, 2010 Lecture #4 23 SOUTH KOREA, HONG KONG, SINGAPORE

WE WILL LEARN MORE ABOUT THE REASONS FOR THE PHILIPPINE LAG IN ECONOMIC PERFORMANCE LATER. The relative scales of the PPFs indicate the PER CAPITA OUTPUT OF THE COUNTRIES COMPARED. The smaller PPF (for the Philippines) indicates that Filipinos in their home land do not produce as much of industrial and agricultural output per head as the citizens of other countries being compared. The average South Korean, Taiwanese, Hong Kong and Singapore residents have a much higher command over goods (many times over) compared to the average Filipino because the former work in more productive economies. Nov. 19, 2010 Lecture #4 24

TOPIC 3: THREE FUNDAMENTAL LAWS OF ECONOMICS TO EXPLAIN

DEMAND SUPPLY COMMERCE OR TRADE

Nov. 19, 2010 Lecture #4 25

LAWS OF CONSUMPTION

THE LAW OF DIMINISHING MARGINAL UTILITY

To explain how
Nov. 19, 2010

the demand for goods is determined. Lecture #4

26

LAWS OF PRODUCTION

THE LAW OF DIMINISHING (MARGINAL) RETURNS

To explain how
Nov. 19, 2010

the supply of goods Lecture #4 is determined.

27

LAWS OF SPECIALIZATION IN PRODUCTION

THE LAW OF COMPARATIVE ADVANTAGE

To explain how regions and countries choose the goods that they produce.
Nov. 19, 2010 Lecture #4 28

CONSUMPTION AND SATISFACTION

Consumption is the act of using goods for immediate satisfaction. We can measure UTILITY OR SATISFACTION.

TABLE 3-1. TOTAL UTILITY Quantity consumed 0 1 2 3 4 5

Nov. 19, 2010

TOTAL SATISFACTION (Utility) 0 6 10 13 15 16

Lecture #4 30

10

Total Utility (TU) 16 14 12 10 8 6 4 2 0 1 2 3 4 5 Quantity consumed

Lecture #4 31

Q 0 1 2 3 4 5

TU 0 6 10 13 15 16

Nov. 19, 2010

GRAPH OF TOTAL UTILITY

Total Utility (TU) 16 14 12 10 8 6 4 2 0 1 2 3 4 5 Quantity consumed

Lecture #4 32

Q 0 1 2 3 4 5

TU 0 6 10 13 15 16

Nov. 19, 2010

GRAPH OF TOTAL UTILITY

MARGINAL UTILITY

The additional satisfaction derived from the consumption of the last unit. MU of last unit = TU of last unit minus TU of previous unit

11

TABLE 3-1. TOTAL AND MARGINAL UTILITY Quantity consumed 0 1 2 3 4 5

Nov. 19, 2010

TOTAL SATISFACTION (Total Utility) 0 6 10 13 15 16

Lecture #4

MARGINAL UTILITY (MU) ? ? ? ? ?

34

MU1= TU1 TU0 = 6

MU4= TU4 TU3 = 2

TABLE 3-1. TOTAL AND MARGINAL UTILITY Quantity consumed 0 1 2 3 4 5

Nov. 19, 2010

TOTAL SATISFACTION (Total Utility) 0 6 10 13 15 16

Lecture #4

MARGINAL UTILITY (MU) 6 4 3 2 1

35

MU1= TU1 TU0 = 6

MU4= TU4 TU3 = 2

Total Utility (TU), w/ MU shown 16 14 12 10 8 6 4 2 0 1 2 3

MU is the darker gray shade.

Q TU 0 1 2 3 4 5
4 5 Quantity consumed

M U 6 4 3 2 1

0 6 10 13 15 16

Nov. 19, 2010

Lecture #4 36 GRAPH OF TOTAL UTILITY, with MU shown

12

Total Utility (TU), w/ MU shown 16 14 12 10 8 6 4 2 0 1 2 3

MU is the darker gray shade.

Q TU 0 1 2 3 4 5
4 5 Quantity consumed
Lecture #4 37

M U 6 4 3 2 1

0 6 10 13 15 16

Nov. 19, 2010

GRAPH OF TOTAL UTILITY, with MU shown

MARGINAL UTILITY (MU) 16 14 12 10 8 6 4 2 0 1 2 3 4 5 Quantity consumed

38

Nov. 19, 2010

Lecture #4 GRAPH OF MARGINAL UTILITY

End of todays lecture. Good day! [Lecture 4]

Nov. 19, 2010 Lecture #4 39

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