Economics coconuts capital island
Section 02: Circular Flow and the Market SystemĮvery society faces some key questions: What goods and services to produce? How to produce those goods and services? and for whom? How a society chooses to answer these questions will in a large part determine the prosperity of the society, its distribution of wealth, and the variety of products and services available. Do any of them fit into more than one category? See if you can classify each of the following resources. These individuals take risks and are rewarded with profits when their ideas are successful.Īll inputs or factors of production can be categorized into one of these four resources.
The last resource is entrepreneurship, which combines the other resources and provides a good or service. Education and job training increase the productivity of the labor resource and thus increase wages – as we’ll see later in the course. As a return for the use of their labor, workers are paid a wage. The labor resource includes both the physical and mental contribution of a worker.
Note that while money is often called capital, it is not an economic resource but simply enables or facilitates the purchase of one of the resources. Interest income is the return or payment for the use of capital. Unlike consumer goods that directly satisfy our needs and wants today, capital goods, such as machinery, increase our future productivity which then allow us to produce more of the goods and services we want in the future. For the use of these resources, businesses pay a rental income.Ĭapital includes man-made items such as buildings, machinery, and equipment. There are four main categories of resources: land, capital, labor and entrepreneurship.Īll natural resources both above and below the ground are part of the land resource including farm land, animals, forests, water, minerals, and air. (e) Determine Tom’s optimal quantity of investment, and explain your results.The production process involves converting resources (aka: factors of production, or inputs) into goods and services. (d) Calculate the net marginal product of capital for each quantity of future trees. (c) Calculate Tom’s present value of profits given each quantity of future trees. (b) Plot the marginal product of capital against the quantity of capital for the future period. (a) Plot the level of output against the quantity of capital for the future period. Output in the future period, for given numbers of trees in production in the future period, is given in the following table: For convenience, we assume here that fractions of coconuts can be produced by trees. When Tom plants coconuts in the current period, he plants them in successively less fertile ground, and the less fertile the ground, the less productive is the coconut tree.
At the end of the future period, Tom can sell any remaining coconut trees for 1 coconut each. If Tom plants a coconut in the ground in the current period, it will grow into a productive coconut tree in the future period. Each period, Tom's trees produce, and then 10% of them die. In the coconut credit market, a loan of 1 coconut in the current period is repaid with 2 coconuts in the future period. Further, Tom can borrow and lend coconuts with neighboring islands. Tom detests coconuts, but he can trade them with people on other neighboring islands for things that he wants. Tom lives on an island and has 20 coconut trees in the current period, which currently produce 180 coconuts.