Producing the right stuff in the right way to maximise Human Happiness Flashcards
How do societies choose exactly what to produce in order to maximise human happiness?
1) The society must figure out all the possible combinations of goods and services that it can produce given its limited resources and the currently available technology.
2) The society must choose one of these possible output combinations - presumably, the combination that maximises happiness.
Define productive efficiency.
Productive efficiency means producing any given good or service using the fewest possible resources. i.e. what’s possible to produce.
Define allocative efficiency.
Allocative efficiency means producing the kinds of goods and services that are going to make people the most happy, and producing them in the correct amounts. i.e. what’s best to produce.
Name two major factors that affect both the maximum amounts and the types of output to be produced.
1) Limited resources
2) Diminishing returns
Define Diminishing returns.
Diminishing returns means that the more you make of something, the less return you get on each successive unit. Eventually, the costs exceed the benefits, which limits how much of it you want to produce, even if the product is your favourite thing. Your resources should be devoted to producing units of other things for which the benefits still outweigh the costs. Diminishing returns implies that, in general, we’re better off not putting all our eggs in one basket.
Diminishing returns is probably the most important economic factor in determining exactly what to produce out of all the things that can possibly be produced given the limited supply of resources.
How do economists traditionally divide inputs, or factors of production?
Into three classes:
LAND: this means more than just real estate or property. it also refers to all naturally occuring resources that can be used to produce things people want to consume. Land includes the weather, plant and animal life, geothermal energy and the electromagnetic spectrum.
LABOUR: the work that people must do in order to produce things. A tree doesn’t become a house without human intervention.
CAPITAL: man-made machines, tools and structures that aren’t directly consumed but are used to produce other things that people do directly consume. For example, a car you drive around for pleasure vs an identical car you use to haul around bricks for your construction business is capital. Capital includes factories, roads, sewers, electrical grids, the internet etc.
What is the definition of human capital?
The knowledge and skills that people use to help them produce output.
A worker with high human capital produces more or better amounts than someone with low hum capital, even though they both work the same no. of hours.
Skilled workers therefore are paid more than unskilled workers.
Societies can become richer by improving the skills of their workers through education and training. This way, more is produced and the workers receive a higher level of pay and enjoy a higher standard of living.
With regards to diminishing returns, describe the low-hanging fruit principle.
You are sent to an apple orchard at harvest time to pick apples. In the first hour, you pick a lot of apples because you go for the low-hanging ones which are easiest to pick. In the second hour, you pick less because you have to start reaching awkwardly for fruit that is higher up. And in the third hour you pick even less; you know have to start jumping off the ground to pick an apple.
What is another way of seeing the effect of diminishing returns?
Noting the increase in costs for producing output.
Eventually, the effects of diminishing returns drive prices so high that you stop devoting further labour resources to picking additional apples.
How might a society overcome the diminishing returns factor?
Because the diminishing returns factor assures that a production process eventually becomes too costly, a society normally allocates its limited resources widely, to many different production processes.
What does the Production Possibilities frontier show?
It lets you visualise the effect of diminishing returns and view the trade-offs you make when you reallocate inputs from producing one thing to producing another. I
It also shows how limited resources limit your ability to produce output.
What causes the changing slope of the PPF?
The changing slope of the PPF in the face of diminishing returns is due to the fact that the opportunity costs of production vary depending on your current allocation of resources.
i.e. if you’re already producing a lot of apples then the opportunity cost of devoting more labour to apple production is high because you’re sacrificing a lot of orange production.
On the other hand, the opportunity costs of devoting that labour to orange production are very low because you only have to give up a few apples.
Any points that lie on the PPF show..
the output combinations you get when you’re PRODUCTIVELY EFFICIENT, or wasting none of your resources.
All points below the PPF are…
productively inefficient.
In the real world, you end up at points below the PPF because of inefficient production technology or poor management. For one reason or another, the resources that are available aren’t being used to produce as much output as possible.
What factors must be held constant regarding the diminishing returns model?
Regarding diminishing returns, you must bear in mind that we are discussing returns to one changing factor whilst holding others constant.
Another simplification of the diminishing returns model is that, other than the particular input that you are allocating, you are implicitly holding constant all other productive inputs, including tech.
However, tech is constantly increasing, so whilst this is a neat model for getting a handle on the problem, you have to adapt it to use it in the real world.
