OKAY. TODAY WE WANT TO START OFF AND TALK A LITTLE BIT ABOUT THIS MODEL THAT WE TALKED ABOUT BEFORE, BUT NOW WE'LL GIVE IT A

Transcription

1 ECO LECTURE FIVE 1 OKAY. TODAY WE WANT TO START OFF AND TALK A LITTLE BIT ABOUT THIS MODEL THAT WE TALKED ABOUT BEFORE, BUT NOW WE'LL GIVE IT A LITTLE BIT MORE THOROUGH TREATMENT. BUT THE PRODUCTION POSSIBILITIES FRONTIER, THE PRODUCTION POSSIBILITIES CURVE. I JUST WANT TO SORT OF EXPLORE THAT. IT'S REALLY A RICHER, FULLER MODEL THAN WHAT WE'VE GIVEN IT CREDIT FOR SO FAR. AND SO ANYWAY, LET'S GET THAT UP HERE. IF YOU'LL REMEMBER THE DEFINITION OF A PRODUCTION POSSIBILITIES CURVE, IT SHOWS COMBINATIONS OF TWO GOODS THAT CAN BE PRODUCED USING ALL AVAILABLE RESOURCES. AND DO YOU REMEMBER WE TALKED ABOUT WHAT THE RESOURCES WERE BEFORE: THE LAND, LABOR, CAPITAL AND ENTREPRENEURSHIP. I WON'T GO THROUGH THAT LIST AGAIN SINCE WE HAVE TALKED ABOUT THOSE BEFORE. BUT LET ME DRAW YOU A GRAPH -- I THINK IT'S JUST A GRAPH THAT WE HAD UP HERE BEFORE. I DREW A STRAIGHT LINE LIKE THIS, GOOD X AND GOOD Y. WE'RE TALKING ABOUT UNITS OF GOOD X AND Y. AND THE POINT I MADE IS THIS: IF WE USE ALL AVAILABLE RESOURCES AND PRODUCE ONLY GOOD X, WE'LL PRODUCE XM -- WELL, LET'S CALL IT XMAX. THAT COULD BE LIKE A NEW STORE CHAIN, COULDN'T IT? XMAX, UNITS OF GOOD X. OKAY. IF WE INSTEAD TOOK ALL OF OUR RESOURCES AND PUT 'EM ONLY INTO PRODUCING GOOD Y, WE COULD GET YMAX, UNITS OF GOOD Y. AND THEN WE CAN VARY THE RESOURCES --

2 ECO LECTURE FIVE 2 HALF AND HALF, TWO-THIRDS AND ONE-THIRD -- BUT WE CAN VARY THE RESOURCES BETWEEN THESE TWO GOODS AND PRODUCE VARIOUS COMBINATIONS OF THE GOODS. OKAY. SO ANYWAY, THERE'S OUR PRODUCTION POSSIBILITIES FRONTIER. LET ME PUT SOME ACTUAL NUMBERS HERE RATHER THAN XMAX AND YMAX, AND SO FORTH. LET'S CALL THESE COMPUTERS AND TELEVISIONS. COMPUTERS AND TELEVISION SETS. THAT'S SUPPOSED TO BE A STRAIGHT LINE. SO WE'VE GOT, IN THIS HORIZONTAL DIRECTION, NUMBER OF COMPUTERS. AND, OF COURSE, IF WE'RE TALKING ABOUT A NATIONAL ECONOMY, WE MIGHT BE TALKING ABOUT FIVE MILLION RATHER THAN JUST FIVE. BUT THE UNITS DON'T MAKE A WHOLE LOT OF DIFFERENCE HERE. AND WE'VE GOT A -- WHAT DO WE HAVE HERE? TEN UNITS OF TELEVISION SETS, TEN MILLION OR WHATEVER YOU'D LIKE TO HAVE. THEN WHAT WE CAN DO IS WE CAN SEE THESE COMBINATIONS OF THE VARIOUS GOODS THAT WE CAN PRODUCE. I'M NOT THE BEST ARTIST. I'M NOT EVEN IN THE RUNNING FOR THE BEST ARTIST. ANYWAY, THE POINT IS, THOUGH, THAT IF WE TAKE ALL OF OUR RESOURCES, I'LL SAY AGAIN, AND PUT ONLY INTO COMPUTER PRODUCTION, WE COULD HAVE FIVE COMPUTERS OR FIVE MILLION COMPUTERS OR FIVE BILLION, WHATEVER THE NUMBER WOULD BE. IF WE TAKE AWAY JUST TWENTY PERCENT OF OUR RESOURCES, TAKE AWAY TWENTY PERCENT OF OUR RESOURCES FROM COMPUTERS AND INSTEAD PUT THOSE IN

3 ECO LECTURE FIVE 3 TELEVISION PRODUCTION, THEN WE'RE GONNA HAVE TWO OR TWO THOUSAND OR TWO MILLION, WHATEVER THE NUMBER IS, BUT TWO UNITS OF TELEVISION SETS. SO WE'VE CUT BACK OUR PRODUCTION OF COMPUTERS SLIGHTLY AND WE'VE INCREASED OUR PRODUCTION OF TELEVISIONS SLIGHTLY AS WE MOVE FROM POINT -- LET'S CALL THIS POINT A TO POINT B. AND AS WE MOVE FROM POINT B TO POINT C, WHAT WE'VE DONE IS WE'VE SACRIFICED ONE MORE COMPUTER. WE'VE TAKEN AWAY THE RESOURCES TO PRODUCE THAT ONE MORE COMPUTER AND WE INSTEAD PUT THOSE IN PRODUCING TELEVISIONS, AND SO WE GET TWO MORE TELEVISIONS. AND SO IT GOES AS WE MOVE OUR WAY UP THE CURVE. EACH TIME WE'RE LOSING ONE COMPUTER AND EACH TIME WE'RE GAINING TWO TELEVISIONS, RIGHT? MINUS ONE. AND SO POINT E, WE'VE LOST ONE MORE COMPUTER, DOWN FROM TWO TO ONE, AND WE'VE GOT TWO MORE TVS, FROM SIX TO EIGHT, AND SO FORTH DOWN TO ZERO AND TEN. OKAY. SO NOW WHAT WE'VE TALKED ABOUT BEFORE IS THE TERM OPPORTUNITY COST. ALONG THIS PARTICULAR PRODUCTION POSSIBILITIES FRONTIER, PRODUCTION POSSIBILITIES CURVE, WE GIVE UP ONE COMPUTER TO GET TWO TV SETS. THIS IS ALSO THE SLOPE OF THE CURVE, ISN'T IT? THE SLOPE OF THE CURVE IS TWO. WE TALKED A LITTLE BIT LAST TIME AT THE END OF THE HOUR ABOUT SLOPE. BUT WHAT I TOLD YOU TO DO IS IF YOU'VE GOT A LINE, PICK TWO POINTS ON THE LINE AND LOOK AT THE HORIZONTAL DISTANCE AND THE VERTICAL DISTANCE BETWEEN THE POINTS.

4 ECO LECTURE FIVE 4 HERE'S B AND C IF YOU LIKE TO THINK ABOUT THAT OTHER CURVE. HERE'S COMPUTERS AND TV SETS, OKAY? AND I TOLD YOU THAT THE SLOPE IS EQUAL TO THE RISE OVER THE RUN BETWEEN THOSE TWO POINTS, THE VERTICAL DISTANCE DIVIDED BY THE HORIZONTAL DISTANCE. AND SO WHAT WE COULD HAVE HERE IS THE VERTICAL DISTANCE IS TWO BETWEEN THE POINTS AND THE HORIZONTAL DISTANCE IS ONE. SO THE SLOPE IS TWO OVER ONE. SO ONE COMPUTER HAS THE SAME COST AS TWO TV SETS, RIGHT? IF YOU WANT TO GET ONE COMPUTER YOU WOULD HAVE TO GIVE UP TWO TV SETS. OR IF YOU WANT TO GET ONE TV SET -- WE CAN DIVIDE HERE -- ONE- HALF COMPUTER IS EQUAL TO ONE TV SET. SO THE COST OF ONE TV SET IS A HALF COMPUTER. THE COST OF ONE COMPUTER IS TWO TV SETS. LET'S SEE. TWO COMPUTERS EQUAL -- THAT'S NOT RIGHT. ONE COMPUTER EQUALS TWO TV SETS. SO IT DEPENDS ON WHAT WE WANT TO TALK ABOUT IN TERMS OF ITS COST. BUT IF WE'RE INTERESTED IN THE COST OF ONE COMPUTER, THE COST OF ONE COMPUTER IS TWO TVS. IF WE'RE INTERESTED IN THE COST OF ONE TV, IT'S A HALF COMPUTER. IT'S THE SLOPE OF THIS LINE WILL TELL US THAT. QUESTIONS ABOUT THIS? STOP ME IF YOU WANT TO TALK ABOUT ANY OF THIS. OKAY. NOW, HERE'S WHAT'S SIGNIFICANT. THIS IS A STRAIGHT LINE. WE WANT TO TALK ABOUT THAT FOR JUST A SECOND. IT'S A STRAIGHT LINE AS STRAIGHT AS I CAN DRAW IT. WE WANT TO TALK ABOUT THAT FOR A

5 ECO LECTURE FIVE 5 SECOND, WHY IT WOULD BE A STRAIGHT LINE. LET ME DRAW ANOTHER PRODUCTION POSSIBILITIES CURVE THAT'S NOT A STRAIGHT LINE. LET'S PUT SOMETHING LIKE WHEAT AND HOUSES. IF WE USE ALL OF OUR RESOURCES IN SOCIETY TO PRODUCE ONLY WHEAT, WE GET SOME MAXIMUM AMOUNT OF WHEAT. IF WE USE INSTEAD, TAKE ALL THE RESOURCES AWAY FROM WHEAT AND JUST PUT IT IN TO PRODUCING HOUSES -- PRODUCING HOUSES, CONSTRUCTION INDUSTRY. WE'VE GOT FARMING AND CONSTRUCTION, DON'T WE? BUT IF WE DO THAT, WE HAVE SOME MAXIMUM AMOUNT OF PRODUCTION. AND THEN SUPPOSE THAT WE VARY OUR RESOURCES BETWEEN THEM, SOME OF OUR RESOURCES INTO PRODUCING WHEAT AND SOME INTO PRODUCING HOUSES, WE'LL HAVE SOME CURVE THAT LOOKS LIKE THIS ONE. THIS ONE IS -- AND LET ME KIND OF JUST JOT THIS UP HERE -- CONCAVE TO THE ORIGIN. MEANING THAT IF YOU WERE STANDING HERE AT THIS ZERO POINT, THIS ORIGIN, LOOKING UP, THIS CURVE WOULD BE -- LOOK SORT OF LIKE A CAVE TO YOU. YOU'D BE LOOKING INSIDE OF IT. IT'S CONCAVE TOWARD THE ORIGIN. ANOTHER WAY OF SAYING IT IS IT'S BOWED OUTWARD AWAY FROM THE ORIGIN. IT'S BOWED OUT. YOU CAN DESCRIBE THAT IN EITHER WAY. BUT IN THIS ONE CASE WE'VE HAD A STRAIGHT LINE PRODUCTION POSSIBILITIES CURVE AND THE OTHER CASE WE HAVE A PRODUCTION POSSIBILITIES CURVE THAT'S EITHER BOWED OUT OR CONCAVE TOWARD THE ORIGIN. WHAT'S THE DIFFERENCE? WELL, THE DIFFERENCE IS THIS:

6 ECO LECTURE FIVE 6 HERE WE WERE TALKING ABOUT TWO THINGS, COMPUTERS AND TV SETS, THAT USE A LOT OF THE SAME TECHNOLOGY, A LOT OF THE SAME SKILL, THE SAME KIND OF FACTORIES, THE SAME KIND OF ASSEMBLY LINE WORKERS. A SIMILAR, DID I SAY, TECHNOLOGY BUT IN TERMS OF DEVELOPING MICRO PROCESSORS AND SO FORTH. VERY SIMILAR TYPES OF TECHNOLOGY HERE. AND SO IF YOU TAKE AWAY RESOURCES FROM PRODUCING COMPUTERS AND PUT THOSE RESOURCES INTO PRODUCING TV SETS, THEY WORK PRETTY WELL. MAYBE JUST A LITTLE BIT OF RETRAINING AND THEY DO JUST AS WELL PRODUCING TVS AS THEY DID PRODUCING COMPUTERS. BUT HERE WHAT YOU HAVE IS THE SKILLS -- YOU NEED A LOT OF LAND TO MAKE WHEAT. YOU NEED A LOT OF RAINFALL. YOU NEED CERTAIN TYPES OF SKILLS. YOU NEED TRACTORS, OF COURSE. CERTAIN TYPES OF SKILLS THAT A FARMER OUT HERE ON THE FARM TO GROW THE WHEAT. THOSE RESOURCES -- THE LAND, THE WATER, THE FARMING SKILL, THE TRACTORS -- THOSE RESOURCES AREN'T THE KINDS OF RESOURCES THAT WOULD NORMALLY BE USED TO MANUFACTURE HOUSES, TO CONSTRUCT HOUSES. THOSE WOULD BE DIFFERENT. AND SO WHAT WE HAVE IN A CASE LIKE THIS IS THAT THE RESOURCES TO PRODUCE WHEAT ARE NOT AS EFFECTIVE AT PRODUCING HOUSES. OKAY. SO IN THIS PARTICULAR CASE, SINCE OUR RESOURCES ARE NOT EQUALLY WELL SUITED TO PRODUCING BOTH GOODS, THEY'RE NOT EQUALLY WELL SUITED TO PRODUCING BOTH GOODS, THEN WE GET A CURVE THAT

7 ECO LECTURE FIVE 7 LOOKS LIKE THIS ONE. AND I'LL TALK MORE ABOUT IT IN JUST A SECOND, BUT SO FAR, YOU KNOW, ALL WE WANT TO DO IS RELATE THIS IDEA TO THE NONLINEAR PRODUCTION POSSIBILITIES FRONTIER. OKAY. AND IT'S DUE TO THE FACT THAT THESE TWO DIFFERENT GOODS USE DIFFERENT RESOURCES, VASTLY DIFFERENT RESOURCES, IN THEIR PRODUCTION WHEREAS IN OUR EARLIER CASE THEY USED VERY SIMILAR RESOURCES OR THE SAME RESOURCES. OKAY. NOW, LET'S TALK ABOUT OPPORTUNITY COST IN THIS PARTICULAR CASE. LET'S SUPPOSE THAT WE START OFF AT THIS POINT RIGHT HERE AND WE'RE USING ALL OF OUR RESOURCES TO JUST PRODUCE HOMES. AND WE SAY, "I WANT TO GET, WHAT, THIS MUCH WHEAT. I WANT TO GET ONE UNIT OF WHEAT AND SO I HAVE TO TAKE RESOURCES AWAY FROM PRODUCING HOMES. I'M GONNA TAKE SOME BUILDERS AND SOME CARPENTERS AND SO FORTH OUT OF HOME PRODUCTION AND SEND THEM OVER AND TELL 'EM TO PRODUCE WHEAT." NOW, YOU KNOW WHICH CARPENTERS WE'D TAKE OUT OF HOME PRODUCTION. THEY'RE THE ONES THAT PROBABLY SHOULDN'T HAVE BEEN THERE IN THE FIRST PLACE. FARMERS WHO WE HAD TAKEN 'EM OFF THE FARM AND PUT 'EM OUT HERE MANUFACTURING HOUSES, BUILDING HOUSES, THEY'RE THE FIRST ONES THAT WE'D SAY, "YOU KNOW, YOU'RE KIND OF AWKWARD AROUND A HOUSE AND AROUND A HAMMER, AND SO FORTH. YOU DON'T SEEM TO KNOW WHAT YOU'RE DOING. BUT YOU'RE AN AWESOME

8 ECO LECTURE FIVE 8 FARMER SO WE'RE JUST GONNA SEND YOU TO THE FARM." AND SO WHEN WE TAKE THIS GUY OR GUYS AND WE TAKE THEM AWAY FROM THE CONSTRUCTION BUSINESS AND SEND THEIR TRACTORS OUT TO THE FARM 'CAUSE WE'RE SAYING, "YEAH, WE'VE BEEN USING YOUR TRACTOR AROUND THE CONSTRUCTION SITE A LITTLE BUT IT HASN'T WORKED OUT THAT WELL." WHEN WE START SHIFTING RESOURCES AWAY FROM HOME PRODUCTION OVER TO WHEAT PRODUCTION, THEN WHAT WE NOTICE IS THAT WE GET A LITTLE BIT FEWER HOMES -- BUT JUST SLIGHTLY. WE'RE GONNA LOSE HOME CONSTRUCTION JUST A LITTLE BIT WHEN WE TRY TO INCREASE OUR WHEAT PRODUCTION WHEN WE MOVE FROM POINT A TO B. WE'RE JUST BARELY GONNA HAVE TO GIVE UP SOME HOUSES. AND THE REASON FOR THAT IS WE HAVE MOVED OUR MOST AWKWARD CARPENTERS OUT OF THE HOUSING CONSTRUCTION BUSINESS ONTO THE FARM. AND THEY WERE BETTER FARMERS THAN BUILDERS. AND SO IN TERMS OF WHAT WE HAVE TO GIVE UP IN TERMS OF HOUSES PRODUCED, NOT VERY MUCH. AND WE GET THIS UNIT OF WHEAT PRODUCED. OKAY. LET'S SAY THAT WE WANT TO DO THIS AGAIN. WE WANT ONE MORE -- I'M GONNA TRY TO MAKE THIS THE SAME AMOUNT HERE. WE WANT ONE MORE UNIT OF WHEAT, ONE MORE MILLION TONS, OR WHATEVER YOU'D WANT TO CALL IT, WE WANT TO MOVE TO POINT C. WE'VE ACTUALLY ALREADY TAKEN OUR MOST AWKWARD CARPENTERS, THE BEST FARMERS, OUT OF PRODUCING HOMES. WE'VE ALREADY MOVED THEM OVER INTO

9 ECO LECTURE FIVE 9 PRODUCING WHEAT. THAT WAS OUR FIRST MOVE, MOVING FROM POINT A TO B. NOW THAT WE MOVE FROM POINT B TO C, WE'RE TAKING SOME PEOPLE AWAY FROM HOUSING CONSTRUCTION THAT ARE A LITTLE BIT MORE GOOD -- A LITTLE BIT BETTER CARPENTERS. NOT MORE GOOD -- A LITTLE BETTER CARPENTERS AND NOT QUITE SO GOOD AS FARMERS. AND SO WHEN WE TRY TO PRODUCE -- INCREASE PRODUCTION OF WHEAT BY JUST THAT ONE MORE UNIT, WHAT WE NOTICE IS CONSTRUCTION OF HOUSING GOES DOWN AGAIN BUT IT GOES DOWN BY MORE THAN IT DID PREVIOUSLY. IN THE FIRST INSTANCE, WE ONLY HAD TO GIVE UP THIS TINY AMOUNT UNITS OF HOUSES IN ORDER TO GET THE WHEAT, THE ONE UNIT OF WHEAT. BUT WHEN WE WANTED ONE MORE UNIT OF WHEAT, WE HAD TO GIVE UP MORE HOUSES. LET'S GO TO THE OPPOSITE EXTREME. I'M GONNA TRY TO GET THIS DISTANCE AND COME BACK TO RIGHT HERE. LET'S SAY THIS IS -- I DON'T KNOW -- TEN, SO THEN WE'LL GO TO NINE. SUPPOSE WE WERE ALREADY AT THE POINT WHERE WE WERE PRODUCING NINE UNITS OF WHEAT -- THIS IS POINT -- I'LL CALL IT D. WE WERE ALREADY PRODUCING NINE UNITS OF WHEAT AND WE WANT ONE MORE. WHAT WE DO IF WE WANT MORE WHEAT, WE HAVE TO TAKE SOME MORE PEOPLE OUT OF PRODUCING HOMES AND MOVE THEM INTO THE FARMING BUSINESS. BUT NOW WHAT WE'RE DOING IS, WE'VE GOTTEN ALL OF THE REALLY AWKWARD CARPENTERS -- WE ALREADY MOVED THEM OUT OF THIS BUSINESS, THE PEOPLE WHO ARE BETTER FARMERS THAN CARPENTERS. AND NOW FOR US TO GET A LITTLE BIT MORE

10 ECO LECTURE FIVE 10 WHEAT, WE'RE MOVING PEOPLE INTO FARMING THAT ARE TERRIBLE FARMERS AND THEY'RE REALLY GOOD CARPENTERS. AND SO WHEN WE INCREASE OUR PRODUCTION OF WHEAT BY ONE MORE UNIT, LOOK AT THE AMOUNT OF HOUSING THAT WE HAVE TO GIVE UP IN ORDER TO GET THAT ONE MORE UNIT OF WHEAT. IT'S A HUGE AMOUNT. SO WHAT'S THE CONCLUSION? THE CURVE HAS THIS APPEARANCE DUE TO THE FACT THAT RESOURCES ARE NOT EQUALLY WELL SUITED TO PRODUCING ALL GOODS. THAT'S WHY THE CURVE HAS THAT SHAPE. AND THEN WHEN WE HAVE A CURVE THAT DOES HAVE THIS PARTICULAR SHAPE, BOWED OUTWARD OR CONCAVE TO THE ORIGIN -- WHEN WE HAVE THAT SHAPE, THEN LET'S TALK IN TERMS OF OPPORTUNITY COST. AT FIRST THE OPPORTUNITY COST OF WHEAT IS VERY LOW. AND THEN AS WE GET A LITTLE MORE WHEAT, THE OPPORTUNITY COST OF WHEAT WENT UP A LITTLE BIT. AND SO IT CONTINUES TO GO UP UNTIL OUT HERE AT THE VERY END, IF WE WANT ONE MORE UNIT OF WHEAT, THE OPPORTUNITY COST OF GETTING THAT WHEAT -- WHAT'S IT COST US? WHAT DO WE HAVE TO GIVE UP IN ORDER TO GET THE ONE MORE UNIT OF WHEAT? A HUGE AMOUNT OF HOUSES, A HUGE NUMBER OF HOUSES. SO WHAT WE HAVE IS WE HAVE INCREASING OPPORTUNITY COSTS. IN OUR EARLIER CASE, WE HAD CONSTANT OPPORTUNITY COST. IF YOU WANT ONE MORE UNIT OF TELEVISIONS, YOU WOULD HAVE TO GIVE UP ONE-HALF UNIT OF COMPUTERS OVER AND OVER AND OVER. IT'D JUST BE THAT

11 ECO LECTURE FIVE 11 CONSTANT COST. BUT HERE THE COST IS INCREASING. THE MORE WHEAT THAT WE GET, THE MORE IT'S COSTING US. THE FIRST AMOUNT OF WHEAT COSTS ALMOST NOTHING. THIS LAST UNIT OF WHEAT COSTS A HUGE AMOUNT. WE SEE THAT GRAPHICALLY BY THE SHAPE OF THE CURVE, BUT THE CAUSE OF IT IS THE REALLY IMPORTANT THING. RESOURCES ARE NOT EQUALLY WELL SUITED TO PRODUCING ALL GOODS. THAT BEING THE CASE, OPPORTUNITY COST IS GONNA RISE, THE MORE OF THIS GOOD THAT WE WANT. NOW, WHAT'S THE LESSON HERE? THE LESSON I SEE IS THAT WE'RE GONNA HAVE INCREASING OPPORTUNITY COSTS IF RESOURCES ARE NOT EQUALLY WELL SUITED TO PRODUCING ALL GOODS. IN REAL LIFE, DO YOU THINK RESOURCES ARE EQUALLY WELL SUITED TO PRODUCING ALL GOODS? USUALLY NOT. I CAN DO CERTAIN THINGS BETTER THAN OTHER THINGS. I CAN TEACH ECONOMICS BETTER THAN I CAN PAINT THE HOUSE. I CAN TEACH ECONOMICS BETTER THAN I CAN DO PLUMBING. I CAN TEACH ECONOMICS BETTER THAN I CAN DO MOST ANYTHING. AND THAT'S SAD. I KNOW THAT YOU'VE SEEN HOW I TEACH ECONOMICS. SO IF I'M WORSE AT EVERYTHING ELSE, THAT'S SOME VERY SAD COMMENTARY, ISN'T IT? ANYWAY, IN REAL LIFE, I'M SAYING I THINK THAT MOST OF THE TIME RESOURCES ARE NOT EQUALLY WELL SUITED TO PRODUCING JUST VARIOUS GOODS. AND SO IN REAL LIFE WE'RE GONNA DEAL WITH PRODUCTION POSSIBILITIES FRONTIERS WITH THIS SHAPE AND IN REAL LIFE WE'RE GONNA

12 ECO LECTURE FIVE 12 FACE INCREASING OPPORTUNITY COSTS. IF WE AS A SOCIETY WANT TO PRODUCE MORE CARS, WE CAN PRODUCE SOME MORE CARS BUT THE MORE CARS WE TRY TO PRODUCE, THE MORE EXPENSIVE IT WILL BE TO PRODUCE 'EM, THE MORE COSTLY IT WILL BE TO PRODUCE 'EM. NOT IN TERMS OF MONEY, BUT IN TERMS OF THE OTHER GOODS AND SERVICES WE HAVE TO GIVE UP IN ORDER TO GET THEM. REALLY, WHAT WE'RE TALKING ABOUT IS THIS. WHEN WE START SPECIALIZING IN PRODUCING THINGS -- AND WE DO SPECIALIZE IN OUR SOCIETY. WHEN WE START SPECIALIZING IN PRODUCING THINGS, AND RESOURCES ARE NOT EQUALLY WELL SUITED TO ALL THINGS THAT WAY. WHEN WE SPECIALIZE, RESOURCES ARE A LITTLE BIT LESS ADAPTABLE, A LITTLE LESS VERSATILE IN TERMS OF BEING USED ON OTHER THINGS. THAT BEING THE CASE, ONE OF THE THINGS THAT WE JUST FACE IN OUR SOCIETY IS THE SITUATION OF INCREASING OPPORTUNITY COSTS. OKAY. ANY QUESTIONS ABOUT THIS, COST AND COST, INCREASING COST? PROBABLY THE INCREASING COST CASE IS THE MOST REALISTIC. I WOULD URGE YOU -- WHEN IT'S TIME TO STUDY FOR A TEST, I WOULD URGE YOU TO WORK THROUGH THESE NUMBERS JUST A LITTLE BIT AND MAKE IT CLEAR TO YOURSELF WHERE I WAS TALKING ABOUT THESE OPPORTUNITY COSTS. WHAT WE HAVE IN EACH ONE OF THESE INSTANCES, JUST MOVING BETWEEN ANY TWO POINTS, IS ONE COMPUTER EQUALS TWO TV SETS. THAT'S BETWEEN ANY TWO POINTS. THAT'S THE SLOPE OF THIS

13 ECO LECTURE FIVE 13 CURVE. AND NOW TO KNOW THE COST OF SOMETHING, ALL WE HAVE TO REALLY DO IS -- WELL, HERE WE'VE GOT THE COST OF ONE -- THE COMPUTER HAS GOT THE COST OF TWO TV SETS. IF YOU WANT IT TO BE -- THE COST TO BE EXPRESSED IN TERMS OF TV SETS, DIVIDE BY TWO ON BOTH OF THESE AND SO YOU GET ONE TV SET AND ITS COST IS ONE-HALF COMPUTER. SO THAT'S HOW TO WORK OUT THESE OPPORTUNITY COSTS IS SIMPLE MATH. WE'LL COME BACK AND DO A LITTLE MORE OF THAT IN A FEW MINUTES. BUT FIRST LET'S GO ON AND TALK ABOUT A FEW LESSONS THAT THE PRODUCTION POSSIBILITIES FRONTIER ILLUSTRATES. THE FIRST LESSON. WE CAN DISTINGUISH BETWEEN ATTAINABLE AND UNATTAINABLE REGIONS -- LET ME DRAW THIS CURVE AGAIN. WHAT'S ATTAINABLE, WHAT'S UNATTAINABLE? HERE'S WHAT IS ATTAINABLE. WITH THE RESOURCES AND TECHNOLOGY AVAILABLE, WE CAN PRODUCE AT ANY POINT ALONG THE PRODUCTION POSSIBILITIES FRONTIER. WE CAN PRODUCE AT ANY OF THOSE POINTS. ALL THOSE POINTS ARE ATTAINABLE. WHAT ABOUT THIS POINT? THIS POINT -- I'LL CALL IT A -- THAT'S UNDERNEATH THE PRODUCTION POSSIBILITIES FRONTIER. IS THAT ATTAINABLE? SURE. WE CAN PRODUCE MORE THAN THAT. WE CAN CERTAINLY PRODUCE THAT MUCH, THAT MUCH OF X AND Y THAT ARE SHOWN BY THIS POINT A. OKAY. SO REALLY WHAT I'M TELLING YOU IS THIS. EVERYTHING ALONG THE PRODUCTION POSSIBILITIES FRONTIER IS ATTAINABLE. WE CAN ATTAIN ALL THOSE WITH OUR RESOURCES AND OUR TECHNOLOGY. WE CAN ATTAIN

14 ECO LECTURE FIVE 14 EVERY POINT UNDER THE PRODUCTION POSSIBILITIES FRONTIER. THE POINTS THAT WE CANNOT ATTAIN ARE POINTS OUTSIDE. I'LL PUT A, WHAT, U, UNATTAINABLE AND THE A WAS ATTAINABLE. BUT THINGS THAT WE CANNOT ATTAIN, THE THINGS THAT WE CANNOT HAVE, ARE COMBINATIONS OF X AND Y LYING BEYOND THE PRODUCTION POSSIBILITIES FRONTIER. OKAY. HOW ABOUT THIS: I'M GONNA PUT ANOTHER POINT HERE AND CALL THAT U. I'M GONNA SAY THAT THAT'S A POINT OF UNEMPLOYMENT. SO WE CAN DISTINGUISH WHAT'S ATTAINABLE, WHAT'S UNATTAINABLE. AND WHAT'S HAPPENING WHEN WE HAVE UNEMPLOYMENT? WHEN WE HAVE UNEMPLOYMENT, WE HAVE RESOURCES THAT ARE NOT WORKING. THIS CURVE, THE FRONTIER ITSELF, IS SHOWING US THE MAXIMUM AMOUNT OF THESE GOODS THAT WE COULD HAVE IF WE USED ALL OF OUR RESOURCES AS EFFICIENTLY AS POSSIBLE. AND IF WE'RE NOT USING ALL OF OUR RESOURCES, THEN WE HAVE SOME UNEMPLOYED RESOURCES. AN EXAMPLE WOULD BE LIKE THAT POINT U THAT I'VE LABELED RIGHT THERE. WE HAVE RESOURCES THAT ARE JUST NOT WORKING. WE HAVE PEOPLE NOT GOING TO WORK, WE HAVE MACHINES THAT ARE NOT BEING RUN HOWEVER MANY HOURS A DAY THEY WERE DESIGNED TO BE RUN, WE HAVE LAND THAT'S NOT BEING PUT INTO USE, AND SO FORTH. SO ANYWAY, THE PRODUCTION POSSIBILITIES CURVE CONTAINS THESE IDEAS. WE'VE ALREADY TALKED ABOUT ANOTHER IDEA, SCARCITY. WE TALKED ABOUT THAT A FEW DAYS AGO. BUT THE IDEA OF SCARCITY IS, LET'S

15 ECO LECTURE FIVE 15 SAY WE DESIRE TO BE AT SOME POINT LIKE THIS. WE DESIRE TO HAVE A HUGE AMOUNT OF ALL GOODS, REALLY. WE'D LIKE TO HAVE A HUGE NUMBER OF TVS AND COMPUTERS AND HOUSES AND CARS. WE DESIRE TO HAVE A HUGE AMOUNT BUT WE'RE NOT ABLE TO ATTAIN ALL THAT. LET ME JUST KIND OF GET THESE THINGS OUT OF HERE. AND IF YOU'LL REMEMBER WHAT I SAID THE OTHER DAY IS, THIS CONDITION THAT WE HAVE, WHERE THAT OUR DESIRES EXCEED THE RESOURCES AVAILABLE TO PRODUCE GOODS -- WE'D LIKE TO HAVE MORE THAN WE ACTUALLY CAN HAVE -- THAT'S THE IDEA OF SCARCITY. WE CANNOT HAVE ALL -- AS MUCH OF THINGS AS WE WOULD LIKE TO HAVE. OPPORTUNITY COST IS ILLUSTRATED BY THIS DIAGRAM, BY THIS MODEL. AND IF YOU'LL REMEMBER, WE JUST TALKED ABOUT THAT ONE MOMENT AGO -- JUST PICK A COUPLE OF POINTS, POINT A AND POINT B, AND OPPORTUNITY COST -- THE COST OF GETTING THIS LITTLE BIT OF EXTRA X IS HOW MUCH OF Y THAT WE HAVE TO SACRIFICE IN THE PROCESS. SO OPPORTUNITY COST IS THE SLOPE OF THE CURVE AS WE SAID JUST A MOMENT AGO. MOVING FROM ONE POINT TO ANOTHER ON THE PRODUCTION POSSIBILITIES FRONTIER. SO IT ILLUSTRATES THAT CONCEPT. CHOICE. CHOICE IS ILLUSTRATED BY THIS. THE IDEA IS WE WOULD LIKE TO BE OUT HERE BEYOND THE PRODUCTION POSSIBILITIES CURVE BUT CANNOT BE, AND SO WHAT WE HAVE TO DO IS WE HAVE TO CHOOSE. IF YOU CAN'T HAVE WHAT YOU WANT, IF YOU CAN'T HAVE EVERYTHING YOU WANT,

16 ECO LECTURE FIVE 16 WHAT WILL YOU CHOOSE TO HAVE? LET ME DRAW THE CURVE AGAIN AND ALL I'M SAYING TO YOU IS, YOU'VE GOTTA CHOOSE SOME POINT ALONG THAT CURVE. WHERE DO YOU WANT TO BE? DO YOU WANT A LITTLE BIT MORE OF GOOD Y? DO YOU WANT A LITTLE BIT LESS OF GOOD Y AND MORE X? CHOOSE. THE NECESSITY TO CHOOSE IS THERE BECAUSE WE CANNOT ATTAIN ALL THAT WE DESIRE. AND THAT BEING THE CASE, WE HAVE TO DECIDE WHAT'S MOST IMPORTANT TO US. AND FINALLY, THE IDEA OF EFFICIENCY IS ILLUSTRATED. WHAT DO WE MEAN BY EFFICIENCY? WELL, WHAT I MEAN BY EFFICIENCY IN THIS PARTICULAR INSTANCE IS I MEAN GETTING AS MUCH OUTPUT, AS MUCH PRODUCTION AS POSSIBLE FROM THE RESOURCES AVAILABLE. LET ME CREATE A POINT A RIGHT HERE. LET'S MAKE A POINT B THERE. WHAT I WANT TO SHOW YOU IS THAT POINT B IS NOT EFFICIENT AND HERE'S THE WAY I GO ABOUT THAT. IF WE STARTED OFF AT POINT B, WHAT WE WOULD HAVE THERE -- LET'S SAY FIVE UNITS OF GOOD X AND FIVE UNITS OF GOOD Y. I'M JUST MAKING UP THE UNITS, OF COURSE. BUT WE'D START OFF AT FIVE UNITS OF EACH GOOD, AND I'M SAYING THAT'S NOT EFFICIENT BECAUSE IT'S ALSO POSSIBLE FOR US TO PRODUCE A POINT A -- IT IS ON THE PRODUCTION POSSIBILITIES FRONTIER. IT'S POSSIBLE FOR US TO KEEP THE FIVE UNITS OF Y AND MOVE OVER HERE AND HAVE, LET'S SAY, SEVEN UNITS OF GOOD X AT THIS COMBINATION. AND SO IF WE CAN HAVE MORE OF GOOD X WITHOUT GIVING UP ANY OF GOOD Y, THAT MEANS THAT WE WERE NOT PRODUCING

17 ECO LECTURE FIVE 17 AS MUCH AS WAS POSSIBLE WITH THE RESOURCES THAT WE HAVE. AND IF WE'RE NOT PRODUCING AS MUCH AS POSSIBLE WITH THE RESOURCES WE HAVE, WE'RE USING OUR RESOURCES INEFFICIENTLY. WE CAN SIMPLY GET MORE OUT OF OUR ECONOMY THAN WE ARE GETTING OUT OF IT AT POINT B. SO POINT B IS A POINT OF INEFFICIENCY AND POINT A IS A POINT OF EFFICIENCY. QUESTIONS ABOUT ANY OF THIS? LET'S GO ON AND TALK ABOUT ECONOMIC GROWTH. THIS IS ANOTHER IDEA THAT CAN BE ILLUSTRATED WITH THE PRODUCTION POSSIBILITIES FRONTIER. LET ME DRAW THE FIRST PRODUCTION POSSIBILITIES FRONTIER UP HERE AND I'LL JUST LABEL THAT "A PRIME." THAT SHOWS HOW BIG OUR ECONOMY IS, HOW PRODUCTIVE OUR ECONOMY IS. ECONOMIC GROWTH WOULD APPEAR LIKE THIS: I'LL SAY B PRIME. IN THIS PARTICULAR INSTANCE, ECONOMIC GROWTH JUST APPEARS AS A PRODUCTION POSSIBILITIES CURVE THAT'S SHIFTING OUTWARDS. WE CAN HAVE MORE OF GOOD X OR WE CAN HAVE MORE OF GOOD Y, OR ACTUALLY WE COULD HAVE MORE OF BOTH. SO THE CONCEPT OF ECONOMIC GROWTH SHOWS UP IN OUR PRODUCTION POSSIBILITIES FRONTIER AS JUST A CURVE THAT IS SHIFTING OUTWARD. BOY, IF WE HAD SOMETHING -- AND WE TALKED A MOMENT AGO ABOUT UNATTAINABLE. IF WE HAD SOME POINT OUT HERE THAT WAS UNATTAINABLE BEFORE -- I'LL PUT THE U UP THERE -- THAT WAS UNATTAINABLE BEFORE, NOW THAT POINT BECOMES ATTAINABLE WITH

18 ECO LECTURE FIVE 18 ECONOMIC GROWTH. SOMETHING THAT WE COULD NOT HAVE IN THE FIRST INSTANCE -- MAYBE THIS IS THE 1980 PRODUCTION POSSIBILITIES FRONTIER AND THIS IS THE LET'S MAKE IT THE 2000 PRODUCTION POSSIBILITIES FRONTIER. SOMETHING THAT IN 1980 WE WOULD'VE JUST SAID, "YOU KNOW, THIS IS IMPOSSIBLE. WE CANNOT BE AT THIS POINT OUT HERE, POINT U. WE CAN'T DO IT. WISH WE COULD." WELL, THEN BY 2000, TWENTY YEARS LATER, IT WAS POSSIBLE. AND SO ECONOMIC GROWTH IS SHOWN IN THIS DIAGRAM AS JUST SHIFTING THE PRODUCTION POSSIBILITIES FRONTIER OUTWARD. HOW FAST DOES THE U.S. ECONOMY GROW? ANYBODY KNOW? WE'LL TALK ABOUT THAT SUBJECT MORE LATER ON IN THE SEMESTER. BUT IN THE NEIGHBORHOOD OF TWO TO THREE PERCENT PER YEAR. THAT'S HOW MUCH THE U.S. ECONOMY GROWS. AND I'M TALKING NOT ABOUT THE DOLLAR VALUE OF WHAT WE PRODUCE. I'M TALKING ABOUT PHYSICAL PRODUCTION OF GOODS AND SERVICES. WE'RE ABLE TO PRODUCE TWO OR THREE PERCENT MORE CARS AND MORE CLOTHES AND MORE HOUSES AND MORE EVERYTHING, REALLY, EACH YEAR. ABOUT TWO OR THREE PERCENT MORE THAN THE YEAR BEFORE. THIS IS KIND OF A GOOD TIME TO DO IT, SO LET ME GIVE YOU A LITTLE MATHEMATICAL FORMULA. I'M GONNA CALL THIS THE RULE OF SEVENTY- TWO. THE RULE OF SEVENTY-TWO TELLS US HOW LONG IS REQUIRED FOR A VARIABLE TO DOUBLE IN VALUE. I ALSO WANT TO PUT UP HERE THAT THIS IS A RULE OF THUMB. AND I DON'T KNOW WHY THEY SAY RULE OF THUMB. BUT

19 ECO LECTURE FIVE 19 IT'S NOT RIGHT AT SIX DECIMAL PLACES OR ANYTHING LIKE THAT; THIS IS PRETTY CLOSE. OKAY. AND HERE'S HOW THE RULE OF SEVENTY-TWO WORKS. SEVENTY-TWO EQUALS R TIMES T, WHERE R IS THE ANNUAL RATE OF INCREASE AND THE VALUE OF THE VARIABLE AND T IS TIME IN YEARS FOR THE VARIABLE TO DOUBLE. SO LET'S COME UP HERE AND USE THREE. SUPPOSE THAT I TELL YOU THAT THE U.S. ECONOMY IS GROWING AT THREE PERCENT A YEAR. SEVENTY-TWO EQUALS THREE TIMES T. NOW, WHAT WE HAVE IS WE HAVE ONE UNKNOWN. ONCE I'VE TOLD YOU THAT THE ECONOMY IS GROWING THREE PERCENT A YEAR, THEN WHAT WE CAN DO IS WE CAN SOLVE FOR THAT ONE UNKNOWN, THE T. THIS BECOMES ONE, THIS BECOMES TWENTY- FOUR. ARE YOU WITH ME ON THIS? SIMPLE MATH. AND HERE'S WHAT THAT SAYS TO ME. T, THE TIME IN YEARS FOR -- HERE IT'S THE SIZE OF THE ECONOMY TO DOUBLE IS TWENTY-FOUR YEARS. AT THREE PERCENT GROWTH A YEAR, EVERY TWENTY-FOUR YEARS THE ECONOMY WOULD BE TWICE AS BIG AS IT WAS BEFORE. OKAY. SO IF OUR ECONOMY IS -- I'LL JUST PICK OUT A NUMBER HERE. IF OUR ECONOMY IS NINE TRILLION DOLLARS IN SIZE RIGHT NOW AND IF IT GROWS THREE PERCENT A YEAR, THEN TWENTY-FOUR YEARS FROM NOW THE ECONOMY WOULD NOT BE NINE TRILLION DOLLARS IN SIZE. IT'D BE EIGHTEEN TRILLION DOLLARS IN SIZE, TWICE AS BIG. NOW, WE CAN USE THIS IN A LOT OF DIFFERENT WAYS AND THAT'S ONE

20 ECO LECTURE FIVE 20 OF THE REASONS THAT I WANTED TO MENTION IT EARLY ON. YOU CAN USE THIS FOR YOURSELF. LET'S SAY THAT YOU'VE GOT AN INCOME OF -- YOU GO TO WORK FOR TWENTY-FIVE THOUSAND DOLLARS A YEAR WHEN YOU GRADUATE FROM COLLEGE AND YOUR INCOME IS GROWING BY -- WELL, LET'S SAY SIX PERCENT A YEAR. I'LL JUST KIND OF JOT THAT UP HERE. WHAT'D I SAY, TWENTY-FIVE THOUSAND DOLLARS A YEAR? AND IT'S GROWING, I SAID, SIX PERCENT A YEAR? HOW LONG UNTIL YOU EARN FIFTY THOUSAND DOLLARS? WELL, WE COULD COME BACK UP TO THIS FORMULA AND SAY SEVENTY-TWO EQUALS SIX TIMES T, DIVIDE BY SIX. THIS BECOMES TWELVE, DOESN'T IT? SO TWELVE EQUALS T. TWELVE YEARS LATER YOU'D BE EARNING FIFTY THOUSAND DOLLARS. MAKE SENSE TO YOU? LET'S SAY THAT YOU HAD A HUNDRED THOUSAND DOLLARS INVESTED IN THE STOCK MARKET AND IT'S GROWING EIGHTEEN PERCENT A YEAR. NOW, NOT THAT YOU CAN COUNT ON THE STOCK MARKET TO GO UP EIGHTEEN PERCENT A YEAR, BUT SUPPOSE IT DOES. YOU'VE GOT A HUNDRED THOUSAND DOLLARS IN THE STOCK MARKET, THE STOCK MARKET'S GOING UP EIGHTEEN PERCENT A YEAR -- WHERE'S A GOOD PLACE TO WRITE? SEVENTY-TWO EQUALS EIGHTEEN TIMES T. YOU DIVIDE BY EIGHTEEN -- HELP ME OUT HERE. FOUR? IN FOUR YEARS, YOUR HUNDRED THOUSAND DOLLARS WOULD BECOME TWO HUNDRED THOUSAND DOLLARS. YOU GET IT? SO YOU CAN USE THIS RULE OF THUMB -- AND I'LL SEE IF I CAN'T GET

21 ECO LECTURE FIVE 21 AN OPPORTUNITY FOR YOU TO USE IT ON TEST DAY. BUT THIS RULE OF SEVENTY-TWO CAN BE USED REALLY FOR A LARGE NUMBER OF APPLICATIONS. BUT ONE OF 'EM IS THIS THING THAT WE STARTED OFF HERE TALKING ABOUT, WHICH IS HOW RAPIDLY THE ECONOMY IS GROWING. LET'S SAY THE ECONOMY IS GROWING -- WE SAID AT FIRST THREE PERCENT A YEAR, THEN WE SAID EVERY TWENTY-FOUR YEARS THE ECONOMY DOUBLES IN SIZE. IF THE ECONOMY GROWS AT TWO PERCENT A YEAR -- YOU KNOW, THAT DOESN'T SOUND LIKE MUCH, DOES IT? TWO PERCENT, THREE PERCENT, WHO CARES? BUT IF THE ECONOMY IS GROWING TWO PERCENT A YEAR, IT WOULD TAKE THIRTY-SIX YEARS FOR THE ECONOMY TO DOUBLE IN SIZE. NOT TWENTY-FOUR AS BEFORE BUT NOW THIRTY-SIX. AND SO YOU MIGHT THINK, "YEAH, TWO PERCENT, THREE PERCENT. THOSE SOUND LIKE ABOUT THE SAME. THEY'RE NOT THAT MUCH DIFFERENT." IT MAKES A BIG DIFFERENCE IN PRACTICE. IT WOULD MAKE A BIG DIFFERENCE IN PRACTICE WHETHER YOUR STOCK MARKET INVESTMENT WAS GOING UP EIGHTEEN PERCENT A YEAR OR TWELVE PERCENT A YEAR. EIGHTEEN PERCENT A YEAR? EVERY FOUR YEARS YOU DOUBLE YOUR MONEY. TWELVE PERCENT A YEAR? IT'S EVERY SIX YEARS. AND SO FORTH. SO ANYWAY, NOW BACK TO OUR STORY. WE WANT TO TALK ABOUT ECONOMIC GROWTH. WHAT CAUSES THIS TO HAPPEN? WHY DOES THE ECONOMY GROW? JUST BECAUSE IT HAS TO GROW? NO, IT DOESN'T HAVE TO GROW. IS THERE SOMETHING JUST BUILT IN TO ECONOMIES THAT MAKE

22 ECO LECTURE FIVE 22 'EM EXPAND? NO, THERE'S NOT. THERE'S A LOT OF ECONOMIES AROUND THE WORLD THAT DO NOT GROW. SO WHAT MAKES AN ECONOMY GROW? NORMALLY, TWO THINGS. ONE, MORE RESOURCES -- AND I MEAN BY THAT WE'VE GOT MORE LAND, LABOR, CAPITAL, ENTREPRENEURSHIP. A GROWING NUMBER OF RESOURCES OR, TWO, BETTER TECHNOLOGY. FORTUNATELY FOR US, WE'RE LIVING IN AN ERA WHEN TECHNOLOGY'S IMPROVING RAPIDLY. BUT ANYWAY, MORE RESOURCES OR BETTER TECHNOLOGY. IF WE HAVE MORE RESOURCES -- YOU KNOW, THE SHAPE OF THE PRODUCTION -- OR I'M SORRY -- THE POSITION OF THE PRODUCTION POSSIBILITIES CURVE TO BEGIN WITH WAS BASED ON HOW MUCH LAND, LABOR, CAPITAL AND ENTREPRENEURSHIP DO WE HAVE AVAILABLE. AND NOW, IF WE HAD, LET'S SAY, TEN PERCENT MORE OF THOSE RESOURCES, THAT PRODUCTION POSSIBILITIES CURVE WOULD SHIFT OUTWARD BY ABOUT TEN PERCENT. NOW, LET'S GO DOWN THROUGH THE LIST: LAND, LABOR, CAPITAL, ENTREPRENEURSHIP. LAND. ARE WE GONNA GET TEN PERCENT MORE LAND FROM ONE YEAR TO THE NEXT? SEEMS UNLIKELY, DOESN'T IT? SO IF WE'RE NOT GONNA GET -- AND MAYBE I OUGHT TO MAKE MY LIST UP HERE AGAIN OF THESE RESOURCES: LAND, LABOR, CAPITAL, AND ENTREPRENEURSHIP. ENTREPRENEURSHIP, THAT'S A FRENCH WORD. IF WE'RE NOT GONNA BE GETTING FIVE OR TEN OR TWENTY PERCENT MORE LAND, THAT DOESN'T SEEM TO BE A SOURCE OF ECONOMIC GROWTH. WE COULD GO AND CONQUER CANADA AND THEN WE WOULD HAVE A LITTLE BIT MORE LAND. IN

23 ECO LECTURE FIVE 23 TERMS OF WORLD ECONOMIC GROWTH, THAT WOULDN'T HELP. WE HAVEN'T CREATED LAND. IT WOULD JUST SHIFT IT FROM CANADA TO THE UNITED STATES. I DON'T THINK WE'RE GETTING READY TO CONQUER CANADA SO THAT'S NOT REALLY IN THE CARDS. I DON'T THINK WE'RE GETTING READY TO CONQUER ANYBODY. ANYWAY, SO I'M SAYING TO YOU, LAND -- THAT'S NOT REALLY GONNA BE A SOURCE OF GROWTH. WE'RE NOT ABLE TO ACCUMULATE MUCH MORE LAND. YOU KNOW, IN HOLLAND THEY WOULD GO OUT INTO THE OCEAN, BUILD A DIKE, PUMP THE WATER BACK OUT OVER THE TOP OF THAT DIKE, AND REVEAL THE LAND UNDERNEATH AND THEY PRODUCED A LITTLE BIT OF LAND. AND ALSO WE DON'T WANT TO FORGET THAT WHEN WE SAY LAND WE MEAN ALL THOSE NATURAL RESOURCES. SO IT WOULD BE POSSIBLE THAT WE WOULD CLEAN UP THE AIR, GET RID OF SOME OF THE POLLUTION IN THE AIR AND THEN WE'D HAVE MORE CLEAN AIR. SAME THING WITH THE WATER AND SO FORTH. SO WE CAN CLEAN UP SOME OF THESE RESOURCES AND HAVE A LITTLE BIT MORE, BUT THIS IS A TOUGH GO. I MEAN, IT'S JUST NOT AN EASY THING TO HAVE FIVE OR TEN OR TWENTY PERCENT MORE NATURAL RESOURCES. AND SO THAT'S NOT GONNA BE A SOURCE OF GROWTH. HOW ABOUT LABOR? IS THE LABOR SUPPLY, THE LABOR FORCE, IS THAT GROWING? AND THE ANSWER IS, YEAH, IT'S GROWING A LITTLE BIT, NOT RAPIDLY. THE LABOR FORCE GROWS ABOUT ONE PERCENT A YEAR IN THE UNITED STATES, MORE OR LESS. BUT THAT'S JUST A BALLPARK

24 ECO LECTURE FIVE 24 NUMBER. IT CAN BE A LITTLE MORE OR A LITTLE LESS. ABOUT ONE PERCENT A YEAR. ON THE OTHER HAND, YOU KNOW -- OR MAYBE YOU DON'T KNOW -- I KNOW -- THAT IN A NUMBER OF COUNTRIES, SPAIN, PORTUGAL, JAPAN, ITALY -- IN A NUMBER OF COUNTRIES TODAY THE POPULATION IS NOT GROWING. THE POPULATION'S KIND OF STABILIZED. AND IF YOU LOOK UP FIFTY, SEVENTY-FIVE, A HUNDRED YEARS, A LOT OF COUNTRIES ARE IN A SITUATION WHERE THE LABOR FORCE AND THE POPULATION CAN BE EXPECTED TO GO DOWN, NOT UP. LET'S TAKE THE UNITED STATES, THOUGH, JUST IN OUR CASE. LET'S SAY THE POPULATION AND THE LABOR FORCE ARE GROWING ONE PERCENT A YEAR. THAT IS GONNA BE A SOURCE OF ECONOMIC GROWTH. THIS CURVE WOULD SHIFT OUTWARD ABOUT ONE PERCENT A YEAR IF WE HAD ONE PERCENT MORE WORKERS. HERE'S THE BAD NEWS. AT THE SAME TIME WE'RE ABLE TO PRODUCE ONE PERCENT MORE GOODS AND SERVICES, WE HAVE ONE PERCENT MORE PEOPLE TO SHARE THAT. AND SINCE WE HAVE MORE PEOPLE TO SHARE IN WHAT WE PRODUCE, ON A PER CAPITA BASIS, ON A PER PERSON BASIS, WE'LL NOT REALLY EXPERIENCING MUCH ECONOMIC GROWTH. IT'S MORE A CASE OF, YEAH, WE'VE GOT A BIGGER ECONOMY AND WE'VE GOT MORE PEOPLE TO SHARE IT WITH AND WE'RE ALL ABOUT THE SAME OFF IN TERMS OF OUR WELL-BEING AS WE WERE BEFORE. SO WHAT I'M SAYING TO YOU IS, GROWTH IN THE LABOR SUPPLY IS A SOURCE OF TOTAL ECONOMIC GROWTH. BUT IN TERMS OF PER CAPITA

25 ECO LECTURE FIVE 25 GROWTH, PER PERSON GROWTH, NOT REALLY. HMMM. CAPITAL AND ENTREPRENEURSHIP. THIS ENTREPRENEURSHIP IS LARGELY ONE OF IDEAS. YOU KNOW, THE ENTREPRENEUR IS THE ONE -- WE TALKED ABOUT THE ENTREPRENEUR THE OTHER DAY. THE ENTREPRENEUR IS THE ONE WHO SAYS, "HERE'S WHAT PEOPLE WOULD LIKE TO HAVE: BLUE SALT." YEAH, I THINK I TALKED ABOUT THAT THE OTHER DAY. BLUE SALT. IT'S AN IDEA. "I THINK PEOPLE WANT THIS. THEY STOP ME ON THE STREET AND ASK ME ABOUT IT." THEY SAY, "TOM, WHEN'S THAT BLUE SALT THING COMING OUT?" AND I SAY, YOU KNOW, "VERY SOON NOW. WE'RE DOING SOME TESTS OVER IN EUROPE." ANYWAY, THESE ARE IDEAS. CAN WE HAVE MORE IDEAS? OH, YEAH, WE CAN HAVE IDEAS. THERE'S NOT A LIMIT TO THAT. ENTREPRENEURS ARE THE SOURCE OF ECONOMIC GROWTH -- OR A SOURCE OF ECONOMIC GROWTH. BECAUSE IT'S JUST THESE IDEAS THAT BUBBLE OUT OF PEOPLE'S HEAD, AND THEN THEY SAID, "I'M GONNA PUT THAT INTO PRACTICE," AND THEY GO OUT AND START UP A COMPANY AND DO IT. HOW ABOUT CAPITAL? AND THE ANSWER IS, THERE'S NOT A VERY TIGHT LIMIT ON THE AMOUNT OF CAPITAL THAT WE HAVE. WE CAN PRODUCE CAPITAL FROM NATURAL RESOURCES. THERE'S A LOT OF NATURAL RESOURCES OUT THERE. I'M SAYING THAT IT'S NOT EASY TO CAUSE THE AMOUNT OF NATURAL RESOURCES TO GROW. BUT THERE'S STILL A LOT OF NATURAL RESOURCES OUT THERE. WE CAN TAKE A VERY SMALL AMOUNT OF

26 ECO LECTURE FIVE 26 NATURAL RESOURCES AND TURN IT INTO CAPITAL GOODS. AND SO THESE THINGS RIGHT HERE, CAPITAL INVESTMENT AND ENTREPRENEURSHIP, ARE IDEAS. THOSE ARE THE SOURCES OF OUR ECONOMIC GROWTH. NOW, CAPITAL WOULD INCLUDE THINGS LIKE COMPUTERS, WAREHOUSES, DUMPTRUCK OR DELIVERY TRUCK, HAMMERS -- AND THAT'S A FEW EXAMPLES. I'LL STOP LISTING THEM. A CAPITAL GOOD -- AND WE'RE TALKING ABOUT SOMETHING PHYSICAL, SOMETHING TANGIBLE HERE. BUT A CAPITAL GOOD IS A GOOD THAT HAS BEEN PRODUCED BY PEOPLE AND IT'S USED IN TURN IN THE PRODUCTION OF OTHER GOODS. AND SO I'M SAYING THESE THINGS RIGHT HERE -- COMPUTERS, WAREHOUSES, DUMPTRUCKS, HAMMERS -- THOSE THINGS HAVE BEEN PRODUCED BY PEOPLE, AND THEN THOSE THINGS ARE USED TO PRODUCE OTHER THINGS, RIGHT? AND SO WE CAN ACCUMULATE CAPITAL GOODS AND THEN THAT WILL BE A SOURCE OF ECONOMIC GROWTH. WE HAVE A LOT OF CAPITAL GOODS INVESTMENT IN THE UNITED STATES. AND IN THE LAST TEN OR FIFTEEN YEARS, A LOT OF THAT HAS BEEN HIGH-TECH KIND OF INVESTMENTS, MORE COMPUTERS THAN WAREHOUSES OR DUMPTRUCKS. AND SO, YES, WE DO HAVE ECONOMIC GROWTH IN THAT. AND ENTREPRENEURSHIP? YOU KNOW, WE CAN'T DO A WHOLE LOT ABOUT PUTTING NEW IDEAS INTO PEOPLE'S HEADS. BUT WHAT WE CAN DO IS WE CAN INFLUENCE PEOPLE TO TAKE THOSE IDEAS AND RUN WITH 'EM, DO SOMETHING WITH 'EM. TAKE IT FROM AN IDEA AND PUT IT INTO ACTION. AND

27 ECO LECTURE FIVE 27 ONE WAY THAT WE CAN ENCOURAGE PEOPLE TO DO THAT IS WE COULD GIVE 'EM LOWER TAXES ON THEIR PROFITS. IF YOU GO OUT AND START UP THE BLUE SALT COMPANY AND YOU MAKE A MILLION DOLLARS FROM IT, WE WON'T TAX THAT. WE'LL JUST LET YOU KEEP THE MILLION DOLLARS. WELL, THAT WOULD BE A REAL INDUCEMENT. IF INSTEAD WE SAID, "YOU START UP THE BLUE SALT COMPANY AND YOU MAKE A MILLION DOLLARS, WE'RE GONNA TAX SEVENTY-FIVE PERCENT OF THAT AWAY." THEN I'M THINKING, "WELL, IF I MADE A MILLION, I'D ONLY KEEP TWO HUNDRED AND FIFTY THOUSAND DOLLARS." NOW, THAT'S A LOT, BUT I'M GONNA TAKE A LOT OF RISK ALSO. IF PEOPLE DON'T LIKE THE BLUE SALT IDEA, THEN I'LL LOSE EVERYTHING I INVEST. AND SO THE MORE FAVORABLE WE MAKE THAT OUTCOME, IF I GET TO KEEP EVERYTHING AS OPPOSED TO ONLY KEEPING A QUARTER OF IT, THEN I'M MUCH MORE LIKELY TO PUT THAT IDEA INTO PRACTICE. AND SO THAT'S REALLY WHAT WE'RE TALKING ABOUT HERE IS PUTTING THE IDEA INTO PRACTICE AS OPPOSED TO I'VE GOT AN IDEA. SO -- AND LET ME MENTION ONE OTHER THING, HUMAN CAPITAL. AND ECONOMISTS ACTUALLY INCLUDE THAT AS A CAPITAL GOOD. SO I WANT TO MENTION IT SPECIALLY JUST SO YOU'RE COMFORTABLE WITH THAT TERM. HUMAN CAPITAL IS BASICALLY THIS: IT IS INVESTING IN THE WORKER, THE LABORER, TO MAKE THAT WORKER MORE PRODUCTIVE. HUMAN CAPITAL -- YOU GUYS ARE INVESTING IN HUMAN CAPITAL BY GOING TO COLLEGE. YOU GO TO COLLEGE, YOU LEARN SKILLS YOU DIDN'T HAVE BEFORE, AND NOW

28 ECO LECTURE FIVE 28 YOUR LABOR SERVICES ARE MORE DESIRABLE THAN BEFORE TO AN EMPLOYER, AND SO YOUR PAY IS GONNA GO UP. YOU'RE GONNA BE MORE PRODUCTIVE, YOUR PAY IS GONNA BE HIGHER AS A RESULT OF GOING TO COLLEGE. BUT THERE'S A LOT OF OTHER THINGS YOU CAN DO TO BUILD HUMAN CAPITAL. YOU COULD TAKE A NIGHT CLASS, LEARNING HOW TO RUN A PARTICULAR COMPUTER SOFTWARE PROGRAM. YOU CAN ALSO BUILD YOUR HUMAN CAPITAL BY JUST HAVING A JOB AND WORKING AND LEARNING SKILLS. SO THERE'S MANY DIFFERENT WAYS OF BUILDING HUMAN CAPITAL. BUT THE POINT IS, IS THAT HUMAN CAPITAL -- AND EDUCATION IS THE SORT OF GENERAL TERM THAT WE TALK ABOUT, HOW PEOPLE BUILD HUMAN CAPITAL. HUMAN CAPITAL AFFECTS OUR ECONOMY PRETTY MUCH THE SAME WAY AS GETTING MORE COMPUTERS AND SO FORTH. WE'RE SIMPLY ABLE TO PRODUCE MORE IN THE WAY OF GOODS AND SERVICES THAN WE COULD IN PREVIOUS YEARS. SO THEN CAPITAL AND HUMAN CAPITAL PLUS ENTREPRENEURSHIP, THOSE ARE GONNA BE THE SOURCES OF ECONOMIC GROWTH. ONE FINAL THING AND THEN WE'LL STOP FOR THE DAY. HOW ARE WE GONNA ACCUMULATE CAPITAL? HOW ARE WE GONNA MAKE THIS HAPPEN? HOW ARE WE GONNA PUSH THAT CURVE OUTWARD? WELL, ACCUMULATE CAPITAL. HERE'S HOW TO DO THAT. I WANT TO DRAW ANOTHER PRODUCTION POSSIBILITIES FRONTIER BUT I WANT TO LABEL THE AXES SLIGHTLY DIFFERENTLY. CONSUMER GOODS, CAPITAL GOODS. LET'S

29 ECO LECTURE FIVE 29 START OFF WITH POINT A. WE'RE USING OUR ENTIRE ECONOMY, ALL OF THE RESOURCES, TO PRODUCE ONLY CONSUMER GOODS: CARS, TV SETS, STEREOS, VCRS, YOU KNOW THE TYPES OF THINGS I'M TALKING ABOUT. WE USE EVERYTHING TO PRODUCE CONSUMER GOODS. WE PRODUCE NO CAPITAL GOODS. SO NOW WHAT HAPPENS IS, WE JUST HAVE A FIXED AMOUNT OF CAPITAL. HOWEVER MUCH CAPITAL WE HAD ON HAND AT THE BEGINNING OF THE YEAR, THAT'S WHAT WE HAVE AT THE END OF THE YEAR. WE'RE NOT ACCUMULATING CAPITAL. AND SO THIS PRODUCTION POSSIBILITIES FRONTIER STAYS RIGHT WHERE IT IS. LET'S SAY THAT WE DO SOMETHING LIKE THIS INSTEAD. WE MOVE TO THIS POINT B. WE GIVE UP SOME CONSUMER GOODS. AND WHEN WE DO GIVE UP CONSUMER GOODS, WE TAKE THOSE RESOURCES. WE WERE GONNA PRODUCE CARS, LET'S SAY SPORTS CARS, AND NOW WE TAKE THE RESOURCES AWAY, LABOR AND CAPITAL FROM PRODUCING SPORTS CARS AND WE PUT THAT INTO PRODUCING COMPUTERS, LET'S SAY. CAPITAL GOOD. NOW WE HAVE A LOT OF CAPITAL GOODS. WE'RE ACCUMULATING CAPITAL GOODS, WE'RE PRODUCING CAPITAL GOODS THAT WE DIDN'T HAVE BEFORE. AS A RESULT OF PRODUCING THESE ADDITIONAL CAPITAL GOODS -- MOVING FROM POINT A TO POINT B. THIS CURVE SHIFTS OUTWARD. WE NOW HAVE MORE CAPITAL AND CAPITAL NOW BECOMES A SOURCE OF ECONOMIC GROWTH FOR US. THE ECONOMY IS GROWING DUE TO OUR INVESTMENT IN CAPITAL GOODS.

30 ECO LECTURE FIVE 30 NOW, THAT'S THE GOOD NEWS, IS WE KNOW HOW TO CREATE ECONOMIC GROWTH. HERE'S THE BAD NEWS. IN ORDER TO CREATE ECONOMIC GROWTH, WE HAVE TO INVEST IN CAPITAL GOODS AND THAT MEANS THAT WE HAVE TO GIVE UP CONSUMER GOODS. SO IF WE WANT THE ECONOMY TO BE BIGGER NEXT YEAR THAN IT IS THIS YEAR, WHAT WE HAVE TO DO IS GIVE UP SOMETHING THIS YEAR. WE HAVE TO GIVE UP SOME CONSUMER GOODS THIS YEAR SO WE CAN PRODUCE THE CAPITAL GOODS AND HAVE A BIGGER ECONOMY FOR THE FUTURE. YOU REMEMBER IF GAVE YOU THAT TERM, THAT TNSTAAFL, THERE'S NO SUCH THING AS A FREE LUNCH? WE CAN'T HAVE ECONOMIC GROWTH FOR FREE, EITHER. IF WE WANT ECONOMIC GROWTH, WE HAVE TO GIVE SOMETHING UP. IT HAS AN OPPORTUNITY COST. WE GIVE UP CONSUMER GOODS NOW IN ORDER TO HAVE A BIGGER ECONOMY IN THE FUTURE. AND LET ME TAKE IT BACK AGAIN TO YOUR LEVEL -- AND MINE, TOO. I WENT TO COLLEGE HERE. BUT YOU RIGHT NOW ARE GIVING UP SOMETHING. YOU COULD BE OUT EARNING AN INCOME RATHER THAN GOING TO COLLEGE. YOU GIVE THAT UP IN THE SHORT RUN IN ORDER TO ACCUMULATE HUMAN CAPITAL, IN ORDER TO HAVE A HIGHER INCOME IN THE FUTURE. AND THAT'S WHAT I'M SAYING TO YOU. YES, ECONOMY CAN DO AS WELL. THAT'S WHERE WE'LL END FOR THE DAY AND I'LL SEE YOU NEXT TIME. SO LONG.