slavin 9th ed._econ_ch2 ppt
TRANSCRIPT
McGraw-Hill/Irwin ©2009 The McGraw-Hill Companies, All Rights Reserved
Chapter 2
Resource Utilization
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Learning Objectives
In this chapter you’ll learn:1. The definition of economics.2. The central fact of economics.3. The four economic resources.4. The concepts of full employment, full production, and
underemployment.5. The concept of the production possibilities curve.6. Productive efficiency.7. What enables an economy to grow.8. The law of increasing costs.9. The concept of opportunity cost.
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Economics Defined
Economics is the efficient allocation of the scarce means of production toward the satisfaction of human wants.• The means of production are limited.• Human wants are unlimited.
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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.
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Four Economic Resources
Land
Labor
Capital
Entrepreneurial ability
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Land
Land (a broader meaning than our normal understanding of the word).• Includes natural resources: 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. • Owners of land receive “rent.”
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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
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Capital
Capital• Man-made goods used to produce other goods or services
is what economists call “capital.”• Examples are office buildings, stores, and factories.• Consists of mainly plant and equipment.
• The money owners of “capital” receive is called “interest.”• Capital is the MOST important of the four economic
resources.
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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.
25 million businesses are virtually all entrepreneurs.• The vast majority work for themselves or have 1 or 2
employees.
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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!
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Questions for Thought and Discussion
Why are the means of production scarce?
Why is capital the most important factor of production?
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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.”
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Highest Valued Alternative
Options:• Watch TV.• Talk on the telephone.• Go on a date.• Study economics.
• Opportunity cost is the highest valued alternative that could have been chosen (i.e., study economics).
• Opportunity cost may or may not have a dollar value.
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Inherit $40,000Two choices: Buy a car or go to
college
Bought the car (paid $40,000)
Can’t go to college
College graduate (lifetime earnings) $1,300,000
High School graduate (lifetime earnings) $800,000
Opportunity Cost $500,000
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California 1967–1997
Prisons• Added 21 additional
prisons
Colleges• Added 1 additional college
The Opportunity Cost of building more prisons is building fewer colleges
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Questions for Thought and Discussion
Do Bill Gates or other wealthy persons face scarcity?
Why is capital such an important resource?
What is the opportunity cost of America’s involvement in Iraq?
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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 with out reducing the output of some other good.
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Full Employment and Full Production
Full employment = 5% unemployment rate
From 1971–1996 the unemployment rate was above 5% (in recent years, this has lingered below 5%).
Full production— 85–90% plant utilization rate.
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Underemployment of Resources
An unemployment rate greater than 5%
A capacity utilization rate less than 85%
Discrimination• A phenomenon that has diminished but has not been
eliminated entirely.• Probably keeps our output 10–15% below what it could
be.• If there were truly an efficient allocation of resources.
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The Production Possibilities Curve
The Production Possibilities Curve represents our economy at
• Full employment.
• Full production.
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The Landscape of the Production Possibility Frontier
Points S, A, B, C, and T are efficient with full employment and full plant capacity.
Point D is producing at below efficiency since either plants are being under utilized or the workforce is underemployed.
Any point above the production possibility curve is not achievable.
- Inefficiency -- Inefficiency -
Output of Butter
Outputof Guns
AA
DDBB
CC
TT
SS
Production PossibilitiesCurve ( PPC )
Production PossibilitiesCurve ( PPC )
Production PossibilitiesCurve ( PPC )Only clothing
is producedOnly clothingis producedOnly clothingis produced
Only foodis producedOnly foodis producedOnly foodis produced
All output combinations on the frontier curve are efficient.
All output combinations on the frontier curve are efficient.
All output combinations on the frontier curve are efficient.
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Production Possibilities Curve
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
Units of guns
16
14
12
10
8
6
4
2
AB
C
D
E
F
10
2 3 4 5 6
This Production Possibilities Curve shows the range of possible combinations of guns and butter extending from 15 units of butter and no guns at point A to 5 units of guns and no butter at point F
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Production Possibilities Curve (Continued)
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
Units of guns
16
14
12
10
8
6
4
2
AB
C
D
E
F
10
2 3 4 5 6
• When you are on the curve, to get more of one thing you have to give up some of the other thing.
• The opportunity cost of gaining 1 unit of guns was 1 unit of butter
Had to give up 1 unit of butter
To gain 1 unit of Guns
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Production Possibilities Curve (Continued)
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
Units of guns
16
14
12
10
8
6
4
2
AB
C
D
E
F
10
2 3 4 5 6
• When you are on the curve, to get more of one thing you have to give up some of the other thing.
• In this particular instance, the opportunity cost of gaining 1 unit of guns was 2 units of butter.
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Law of Increasing Costs
As we shift from butter to guns, we have to give up increasing units of butter for each additional unit of guns.
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.
You give up fewer units of butter to get 1 unit of guns up top.
You give up more units of butter to get 1 unit of guns at the bottom
Units of guns
16
14
12
10
8
6
4
2
AB
C
D
E
F
10
2 3 4 5 6
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Economic Growth
Best available technology
Expansion of labor• More or better trained labor
Expansion of capital• More or improved plant and equipment
Investment means growth
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Investment, Consumption, and the Production Possibilities Curve
We can choose between consumption and investment.
Investment increases future production possibilities.
Greater investment means greater future production possibilities.
Point B gives us greater production possibilities than Point A.
Investmentgoods
Consumptiongoods
IA
CA
A
PPC 2015 with BPPC 2015 with BPPC 2015 with B
PPC 2005PPC 2005PPC 2005
PPC 2015 with APPC 2015 with APPC 2015 with A
BBIB
CB
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Questions for Thought and Discussion
Given limited resources, is growth always good? • Why do most mainstream economists embrace growth?
What is the relationship between investment, consumption, and growth? • Can you illustrate this by drawing a graph using production
possibility curves?