Transcript Resource Utilization - Holy Family University

Chapter 2
Resource Utilization
The Central Fact of
Economics: SCARCITY
• Scarcity
– Resources are the things society uses to
produce goods and services
• These resources are scarce (limited)
• The economic problem
– There are never enough resources to produce
all of the goods and services that people want
Four Economic
Resources
• Land
• Labor
• Capital
• Entrepreneurial ability
Land
• Land (a broader meaning than our
normal understanding of the word)
– Includes natural resources such as timber,
oil, coal, iron ore, soil, water, as well as the
ground in which these resources are found
– Is used for the extraction of minerals and
farming
– Provides the site for factories, office
buildings, shopping centers, homes, etc.
– Produces “rent”
Labor
• Labor
– The work and time for which one is
paid is what economists call “labor”
– Money received for one’s labor is
called wages and/or salaries
– About two-thirds of the total resource
cost is the cost of labor
Capital
• Capital
– Man-made goods used to produce other goods or
services is what economists call “capital”
• Examples are office buildings, stores, and factories
– The money owners of “capital” receive is called
“interest”
– Capital is the MOST important of the four economic
resources
Entrepreneurial Ability
• The entrepreneur
–
–
–
–
Sets up a business
Assembles the needed resources
Risks his/her own (or borrowed) money
Makes a “profit” or incurs a “loss”
• Is central to the American economy
– 23 million businesses are virtually all
entrepreneurs
• The vast majority work for themselves or have one or two
employees
Our Economic Problem
Revisited
• Limited resources versus unlimited wants
• There are NOT enough resources to
produce everything that everyone wants
• Therefore, CHOICES must BE MADE!
• Every choice has an “opportunity cost”
associated with it!
Opportunity Cost: An Important,
Fundamental Concept in Economics
• Because we cannot have everything we
want, we must make choices
• The thing we give up (our second-best
choice) is called the opportunity cost of
our choice
– This is the foregone value of the next best
alternative
• In the economic world, “both” is not an
admissible answer to a choice of “which
one”
Inherit $40,000
Two choices – buy a car or go to college
• Bought the car
• Can’t go to college
– (Paid $40,000)
College graduate (lifetime earnings)
High School graduate (lifetime earnings)
Opportunity Cost
$1,300,000
800,000
$ 500,000
Underemployment of
Resources
• An unemployment rate greater than 5%
• A capacity utilization rate less than 85%
The Production Possibilities
Curve
• Represents our economy at
–Full employment
–Full production
As we shift from butter to guns, we have to give Production Possibilities Curve
up increasing units of butter for each additional
16
unit of guns
A
B
14
Hypothetical Production Schedule
Point
Units of Butter Units of Guns
A
15
0
B
14
1
C
12
2
D
9
3
E
5
4
F
0
5
C
12
10
D
8
6
E
4
2
This is known as the “law of increasing cost.”
As the output of one good expands, the
opportunity cost of producing additional
units of this good increases.
F
0
1
2
3
4
Units of guns
5
6
Points Inside and Outside the Production Possibilities Curve Frontier
Point W represents
output at more than full
employment and full
production and is
currently unattainable
16
14
A
B
W
C
12
10
Where we usually are
A Recession
A Depression
D
X
8
Y
6
E
Z
4
2
F
0
1
2
3
4
Units of guns
5
6
Every point on the curve represents output at Full Employment and Full
Production
Every point inside the curve represents output at less than Full employment
and less than Full Production
Productive Efficiency
• Is attained when the maximum possible output
of one good is produced, given the output of
other goods
– Productive efficiency occurs only when we are
operating on the production possibilities curve
– Productivity efficiency means that the output of one
good cannot be attained without reducing the output
of some other good
Economic Growth
• Best available technology
• Expansion of labor
–More or better trained labor
• Expansion of capital
–More or improved plant and
equipment
Production Possibilities Curves
15
PPC3
PPC2
10
PPC1
5
0
5
10
Units of guns
15
A move from PPC1 to PPC2 to PPC3 represents economic growth
Production Possibilities Curves Over Time
Country B
Country A
A.
B.
25
25
20
20
15
15
10
PPC2001
PPC2001
10
B
5
0
PPC1991
PPC1991
5
A
5
10
Units of c onsumer goods
15
Country A represents slower
economic growth than Country B
Country A capital goods is 3.8 units
0
5
10
Units of c onsumer goods
15
Country B represents much faster
economic growth than Country A
Country B capital goods is 7.0 units