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Economics basics for cat 2012 call getters part 2

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Economics Basics for cat 2012 - 2

Economics Basics for cat 2012 - 2

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  • 1.  Means required to satisyends Means as required not given to us Need to transform what we are given Transformation called production
  • 2.  Everyone produces Offer produce for everyone else to consume
  • 3.  Consumers’ goods – Satisfy ends directly and immediately Producers’ goods – Satisfy ends indirectly
  • 4.  Their role in satisfying human ends
  • 5. How much would you be able to produce if You scratched the ground with your bare hands and sowed the seeds? You made yourself a plough, ploughed the land with it and then sowed the seeds?
  • 6.  They get “consumed” The economic angle – Producers’ goods are transformed into Consumers’ goods
  • 7.  Would an isolated man produce?
  • 8.  Crusoe marooned on an island in complete solitude Some resources on island  The only edible thing – berries on trees Low-hanging berries plucked @20 per hour
  • 9.  Consumers’ goods – Berries on hand to eat – Supply Nil Has many producers’ goods of first order More consumers’ goods available => Better off Crusoe’s challenge – Increasing the supply of consumers’ goods The solution - Production
  • 10.  Berry density much higher on upper branches Have a long pole => 25 berries an hour Ready made pole not available What is available – small sticks, vines What Crusoe can do – Produce a long pole  Tie sticks together using vines
  • 11.  10 hours of labour Forsake 10 * 20 = 200 berries now  Alternative – Forsake 10 hours of leisure Why  should Crusoe forsake current consumption?  will Crusoe forsake current consumption? Forsaking present consumption = Saving
  • 12.  25 berries/hour for the life of the pole 50 additional berries per day Let life of stick = 100 hours Additional supply of consumers’ goods = 500 Available over 10 days after producing pole
  • 13.  Saving – Now Increased consumption – In the future
  • 14.  500 future berries preferred to 200 present berries No logical necessity to do so
  • 15.  The preference for end satisfaction now over the same end satisfaction in the future Positive time preference a logical necessity Negative time preferencelogically impossible Has implications for value scale
  • 16. End satisfaction inEnd satisfaction now the futureEnd satisfaction in End satisfaction nowthe future Necessary Impossible
  • 17. End satisfaction nowEnd satisfaction inthe near futureEnd satisfaction inthe distant future
  • 18.  Means valued for end satisfaction Present goods valued over equal quantity of future goods  Present goods – Goods that satisfy end now  Future goods – Goods that satisfy ends in the future
  • 19. 1 apple now  Where will we place1 apple tomorrow  1 apple tomorrow?  1 apple 1 year from now?  1 apple 6 months from1 apple 6 months now?from now1 apple a year fromnow
  • 20. 105 apples a year Consider the following from now situation 100 apples now Where do I place 105 105 apples a year apples a year from from now now? 105 apples a year Above 100 barrels a from now year from now 100 apples a year from now
  • 21. 101 apples a year Forsaking 100 apples from now now => Get 101 apples 100 apples now a year from now Will he defer consumption of 100 apples? Yes 100 apples a year from now
  • 22. 102 apples a year Forsaking 100 apples from now now => Get 101 apples 100 apples now a year from now 101 apples a year from now Will he defer consumption of 100 apples? No 100 apples a year from now
  • 23. 102 apples a year Forsaking 100 apples from now now => Get 102 apples 100 apples now a year from now 101 apples a year from now Will he defer consumption of 100 apples? Yes 100 apples a year from now
  • 24. 103 apples a year For how many apples from now apples 1 year later will 100 apples now he defer consumption of 100 apples now? 102 apples a year from now 103 101 apples a year from now 100 apples a year from now
  • 25. 110 apples a year For how many apples from now apples 1 year later will 100 apples now he defer consumption 109 apples a year of 100 apples now? from now . 110 . . . 101 apples a year from now 100 apples a year from now
  • 26.  We can talk of low and high time preference Reflected in relative rankings of present and future apples 101 (F) > 100 (P) > 100 (F) => Lower time preference than 110 (F) > 100 (P) > 109 (F)
  • 27. High Positive LowPositive Time Preference Time PreferenceLikelihood ofdeferring present Low Highconsumption Inducement More additional Fewer additionalrequired to cause units of means in units of means in deferring future future consumption
  • 28.  Requires forsaking present consumption Requires low positive time preference
  • 29.  Sufficiently low positive time preference 500 units in the future should be valued above 200 units now Calls for a particular structure of the value scale
  • 30. Stages of Production
  • 31.  Output – Largely consumers’ goods Short production processes Few stages of production
  • 32.  Output – Largely producers’ goods Long production processes Many stages Last stage output - Consumers’ goods Other stages - Producers’ goods
  • 33.  Vegetables in your kitchen garden Consume them / Sell them to neighbours
  • 34.  Iron ore mining  Using as body of a car Transportation of ore  Transporting the car Smelting in blast  Stocking the car furnace  Financing purchase of Purification of pig iron the car Modifying properties  Selling the car Shaping
  • 35.  Specialisation and division of labour Superior production systems More output for the same input  Or same output for less input How can we be so certain?
  • 36.  The situation: A has an absolute advantage over B in the production of 2 goods, X and Y The LoCA - It is still advantageous for A to  specialise in that area in which he has a greater comparative advantage over B  leave the other area of production to B  and exchange his produce for B’s produce
  • 37.  Every choice has an opportunity cost Produce X => Cannot produce Y Opportunity cost of X = Y lost in producing 1 X Opportunity cost of Y = X lost in producing 1 Y Need to choose which to produce Obtain the other through exchange
  • 38. Productive Capabilities of 2 people Output per hr Output in 10 hrs Products A B A B X 50 40 500 400 Y 60 45 600 450 A is better than B at producing both X and Y
  • 39. What A What A What B What BProduce Gets loses gets loses X 50 X 60 Y 40 X 45 Y Y 60 Y 50X 45 Y 40 X A’s Opportunity B’s Opportunity Produce Cost Cost 1 unit of X 6/5 Y 9/8 Y 1 unit of Y 5/6 X 8/9 X
  • 40. A’s Opportunity B’s Opportunity Produce Cost Cost 1 unit of X 6/5 Y 9/8 Y 1 unit of Y 5/6 X 8/9 X A’s opportunity cost in producing Y lower than B’s B’s opportunity cost in producing X lower than A’s A produces Y and B produces X
  • 41. 5 hours each A producesY producing X and Y B produces XProduce A B Total A B Total X 250 200 450 0 400 400 Y 300 225 525 600 0 600 Let A now offer B some Y for some X In what ratio will they exchange?
  • 42. A’s Opportunity B’s Opportunity Produce Cost Cost 1 unit of X 6/5 Y 9/8 Y 1 unit of Y 5/6 X 8/9 XB diverts some time Any price will A diverts some timeto Y production benefit both to X production 9/8 6/5 Price of X in terms of Y 6/5Y > Y Price of X > 9/8 Y
  • 43.  Let 210Y be offered for 180 X A and B spend 5 hours A and B specialise and each on producing X trade at the price given and Y aboveConsume A B Total A B Total X 250 200 450 180 220 400 Y 300 225 550 390 210 600Part Produce by Give up Consume Statusy switching A 70X 70*6/5 or 84Y 250X + 306Y Better off B 15Y 15*8/9 or 13-1/3X 206-2/3X + 225Y Better off
  • 44.  Why I employ a driver Why a doctor employs a nurse Why a professor employs a teaching assistant
  • 45.  Land Labour Capital goods Jointly called Factors of Production Factors flow from more to less remote stages Eventually become consumers’ goods
  • 46. Stage 3Factors Stage 2 Factors Stage 1 Factors Consumers’ Goods
  • 47. Stage 3Factors Stage 2 Factors Stage 1 Factors Consumers’ Goods
  • 48.  All income from production goes to factor owners Factor owners =>owners of land and labour No scope for profit in the long-run No income possible to capitalists
  • 49.  Why, then, do capitalists take part in production? What do they do? How do they earn an income? What determines that income?
  • 50.  Look at the time element in production
  • 51.  Consumers pay only when receiving consumers’ good Production => Period of production Producers wait till exchange to consume No one waits => No production
  • 52.  Advance present goods to factor owners Accept services of factors in exchange Land and labour owners can now consume Capitalist does the waiting
  • 53.  Prior saving Made available by forsaking consumption No saving => No capital to advance
  • 54.  Advances capital to factor owners Owns services of factors Owns output of factor services  Higher Stage capitalists – Capital good produced  Last Stage capitalist – Consumers’ good produced Gets revenue upon sale Income = Revenue – Capital advanced
  • 55. Start of 60 oz gold Production 63 oz gold End of Production Money advanced at start of production = 60 oz Money earned from sale of consumers’ good = 63 oz Income to Capitalists = 3 oz
  • 56.  The difference between payouts to factors at the start and income received from sale Expressed as a % 5% in our example Also called interest income  The reward for waiting Earned in every stage
  • 57. Total = 17 Income to Land and Labour = 83Interest Income to Capitalists 19 1 20 8 2 30 13 2 45 12 3 60 16 4 80 15 5 100 Consumer Expenditure 100 oz
  • 58.  What is required for this system to churn out 100 0z worth consumers’ goods every period? The clue - timings of receipts and payments
  • 59.  Symbols Used  Ci – Capitalist in ith stage  t-i – i time periods before stage of consumptionCapitalist Income Timing Payments Timing C1 100 t0 95 t-1 C2 80 t-1 76 t-2 C3 60 t-2 57 t-3 C4 45 t-3 43 t-4 C5 30 t-4 28 t-5 C6 20 t-5 19 t-6 Total 335 318
  • 60.  Capitalist C6 Period Who gets no Who has no output input 1 C5 2 C4,C5 C5, C6 3 C3 to C5 C4 to C6 4 C2 to C5 C3 to C6 5 C1 to C5 C2 to C6 6 ??? C1 to C6
  • 61.  The prerequisite for 100 oz worth output every period is….. Capitalist saving of 318 oz every period If ith stage capitalist does not save….. i periods later, no consumers’ goods output
  • 62.  Capital available changes Effects on production structure
  • 63.  Lower immediate demand for consumers’ goods More money capital available to be advanced in production Longer production structure  Greater division of labour => Greater efficiency => Increased supply + Lower demand => Lower prices A progressing economy
  • 64.  Higher immediate demand for consumers’ goods Less money capital available to be advanced in production Shorter production structure  Less division of labour => Lower efficiency => Decreased supply + Higher demand => Higher prices A retrogressing economy
  • 65.  Capitalist saving critical for production Level of saving drives consumers’ goods output every period
  • 66.  Capitalist income linked to price Capitalist payments linked to factor prices Cap on output price does not cap factor prices  Their determination to be explained in Part 3 Lower income => Lower capitalist saving => Lower supply in future => Higher (equilibrium) prices + Retrogressing economy
  • 67.  Price spread falls Capital moves out Factors applied in production falls Output falls Shortage becomes real
  • 68.  The call is yours 

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