(2367) Microeconomics - 2: Two Big Economic Questions...

Now, in this video, we're going to talk about the two big economic questions. The first economic question is how the choices end up determining what, how, and for whom goods and services get produced. The second big economic question is when do choices made in self-interest promote social interest? What is meant by that is, for example, when does my purchase of a PlayStation 3 promote society's interests? Other than by purchasing a game console, how does it help the general public? That's the kind of stuff we're going to discuss in this video. Now, in this video, we're going to talk about the two big economic questions. The first economic question is how the choices end up determining what, how, and for whom goods and services get produced. The second big economic question is when do choices made in self-interest promote social interest? What is meant by that is, for example, when does my purchase of a PlayStation 3 promote society's interests? Other than by purchasing a game console, how does it help the general public? That's the kind of stuff we're going to discuss in this video. So, what are we producing? For example, people choosing hybrid cars because they're popular answers the question of what we are going to produce. Businesses can see right away that the public wants cars, so what they are going to produce is cars. However, answering this question will probably raise more questions, such as what determines the quantity of cars to produce. Those are the kinds of questions that arise in the 'what' part of the first big economic question. It's pretty qualitative, and you get broad answers, but economics provides some of the answers for these questions, and that's why you really need to know this. Now, the 'how' part of the first question: how are we producing it? The definition here is factors of production. The factors of production are pretty much the resources needed to produce the goods and services. To build our car, we would probably need glass for the windshield, metal for that big metal case in the car, and other materials. The factors of production are grouped into four categories: land, labor, capital, and entrepreneurship. Land is pretty much a no-brainer; almost everything needs to be produced on land because we won't see factories floating in the air. Labor, as you already know, is the work time and effort put into making the goods and services. If you worked at McDonald's, that's labor for you. That's labor because you're getting paid a minimum wage for your time and effort, but that's still labor. Now, the third one is capital. Human capital is the quality of labor that comes from education, work experience, etc. Knowledge and skill are both examples of human capital. Capital refers to tools, machines, buildings, etc., used to produce goods and services. This capital is what we can touch; human capital is what we can't touch. Capital is tangible, as I've written here. We can touch, smell, and taste it, but we probably don't want to taste the building anyway because it probably tastes like dog crap. Human capital is intangible; we can't touch it. We can't touch knowledge; we can't touch skill. We can gain it, but we can't touch, smell, or taste it. The last part of the first question is 'for whom.' For whom are we producing it? Who gets what depends on income distribution. That is pretty much the rule in this world, I guess. For example, Bill Gates can buy millions of jets, or hundreds of jets, because he's a billionaire, but the guy living on the street can probably buy half a McDonald's burger. That's the kind of question we answer here: for whom are we producing it?

What we really have to talk about or learn in this case are these four points, which are testable material because they actually appeared on my test. You can pretty much memorize this: land earns rent, labor earns wages, capital earns interest, and entrepreneurship earns profit. You can think of it as what land and labor are pretty intuitive; it's capital and entrepreneurship that's kind of not intuitive. We know that land earns rent because just think about owning a house; you can earn rent on that. Labor and wages are also intuitive because everybody has worked for a job and earned a salary or wage.

Capital earns interest. When we're talking about capital, think of investments. When you give a loan or something, or when you get a loan, you have to pay interest. So think of investments or loans; that's kind of capital because it involves money, right? The money that's given from the bank as a loan will earn interest for the bank.

Entrepreneurship, you just gotta remember, earns profit. Every person who starts their own business wants to earn a profit. Let's just say it's a business venture; you're starting a business, and you want to earn a profit. That's entrepreneurship for you. Remember these four points and these four categories.

I guess I'll just end this video here, and we'll talk about this more in the next video or the next topic, actually. Please rate, comment, subscribe, and I'll see you.