Principles of Economics Third Edition by Fred Gottheil

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Transcript Principles of Economics Third Edition by Fred Gottheil

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Production Possibilities and Opportunity Costs

Economic Principles

Factors of production Production possibilities Opportunity cost The law of increasing costs

Gottheil - Principles of Economics, 4e 2

Economic Principles

Technological change and economic growth Division of labor and specialization Absolute and comparative advantage

Gottheil - Principles of Economics, 4e 3

Factors of Production

Factors of production

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Any resource used in a production process.

Factors of Production

These resources include:

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Labor

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Land

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Capital

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Entrepreneurship

Factors of Production

Labor

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Labor is the physical and intellectual effort of people engaged in producing goods and services.

Factors of Production

Land

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Land is a natural-state resource such as real estate, grasses and forests, and metals and minerals.

Factors of Production

Capital

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Capital includes the manufactured goods used to make and market other goods and services.

Factors of Production

Human capital

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Human capital is the knowledge and skills acquired by labor, principally through education and training.

Factors of Production

Entrepreneurship

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Entrepreneurship describes the people who alone assume the risks and uncertainties of a business.

Production Possibilities

Production possibilities

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The various combinations of goods that can be produced in an economy when it uses its available resources and technology efficiently.

EXHIBIT 1

PRODUCTION POSSIBILITIES FRONTIER

Exhibit 1: Production Possibilities Frontier

1. What do points A, B, C, and D represent in Exhibit 1?

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They represent four consumption and capital goods possibilities when resources are used efficiently.

Exhibit 1: Production Possibilities Frontier

2. What does the curve that passes through points A, B, C, and D represent?

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The curve represents all of the possible combinations of consumption goods and capital goods.

Exhibit 1: Production Possibilities Frontier

3. Why does the curve have a balloon-like shape?

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The law of increasing costs accounts for the balloon-like shape of the production possibilities curve.

Exhibit 1: Production Possibilities Frontier

4. If a production possibilities frontier was a downward-sloping straight line, would the law of increasing costs still hold?

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No.

Exhibit 1: Production Possibilities Frontier

5. What would cause a production possibilities frontier to be a downward-sloping straight line?

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Resources are not specialized.

Production Possibilities

1. Is an economy operating on its production possibilities frontier if there is a high rate of unemployment?

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No. In this case the economy is operating inside its production possibilities frontier.

Production Possibilities

2. How can an economy produce a combination of goods outside its production possibilities frontier?

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If more resources become available, or if existing resources become more productive.

Evaluating Production Possibilities

1. Two things to keep in mind when evaluating production possibilities:

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Opportunity cost

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The law of increasing costs

Evaluating Production Possibilities

Opportunity cost

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The quantity of other goods that must be given up to obtain a good.

Evaluating Production Possibilities

Opportunity cost is typically subjective. One must rely on calculating expected gains and expected opportunity costs of choices made.

Evaluating Production Possibilities

Law of increasing costs

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The opportunity of producing a good increases as more of the good is produced.

Evaluating Production Possibilities

The law of increasing costs is based on two facts:

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Not all resources are suited to the production of all goods.

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The order of use of a resource in producing a good goes from the most productive resource unit to the least.

Evaluating Production Possibilities

Relationship between opportunity cost and law of increasing costs: A) The opportunity cost of producing a good increases as more of a good is produced.

B) The negative slope of the production possibilities curve illustrates the fact that any increase in capital goods production must come at the cost of consumption goods production.

EXHIBIT 2

SHIFTS IN THE PRODUCTION POSSIBILITIES FRONTIER

Exhibit 2: Shifts in the Production Possibilities Frontier 1. What will cause the production possibilities frontier to shift to the right?

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Investing in capital today expands the resource base of later periods, therefore allowing more capital and consumption goods in the future.

EXHIBIT 3

COMPARATIVE ECONOMIC GROWTH

Exhibit 3: Comparative Economic Growth

1. If an economy chooses to produce at point C, why does the production possibilities curve shift to the right?

A) The economy produced a mixture of consumption and capital goods.

Exhibit 3: Comparative Economic Growth

1. If an economy chooses to produce at point C, why does the production possibilities curve shift to the right?

B) Therefore, capital goods have been added to the resource base for future production.

Exhibit 3: Comparative Economic Growth

2. If an economy chooses to produce at point A on the Production Possibilities Curve, how will its economy compare to the first economy?

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Over time, the production gap between the two economies will widen.

Productive Power of Advanced Technology

Innovation

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Innovation is an idea that eventually takes the form of new, applied technology.

EXHIBIT 4

PRODUCTION POSSIBILITIES GENERATED BY SPEAR AND NET TECHNOLOGIES