Ch02 - Pearson Educationwps.prenhall.com/wps/media/objects/988/1012152/chapter_notes/Ch0… ·...
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C H A P T E R C H A P T E R C H A P T E R 2 Prepared by: Fernando Quijano Prepared by: Fernando Quijano and Yvonn Quijano and Yvonn Quijano © 2004 Prentice Hall Business Publishing © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Principles of Economics, 7/e Karl Case, Ray Fair Karl Case, Ray Fair The Economic Problem: Scarcity and Choice ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ C H A P T E R 2: The Economic Problem: Scarcity and Choice C H A P T E R 2: The Economic Problem: Scarcity and Choice 2 of 40 © 2004 Prentice Hall Business Publishing © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Principles of Economics, 7/e Karl Case, Ray Fair Karl Case, Ray Fair Scarcity, Choice, and Opportunity Cost • Human wants are unlimited, but resources are not. • Three basic questions must be answered in order to understand an economic system: • What gets produced? • How is it produced? • Who gets what is produced? ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ C H A P T E R 2: The Economic Problem: Scarcity and Choice C H A P T E R 2: The Economic Problem: Scarcity and Choice 3 of 40 © 2004 Prentice Hall Business Publishing © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Principles of Economics, 7/e Karl Case, Ray Fair Karl Case, Ray Fair Scarcity, Choice, and Opportunity Cost • Every society has some system or mechanism that transforms that society’s scarce resources into useful goods and services. ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________
Transcript of Ch02 - Pearson Educationwps.prenhall.com/wps/media/objects/988/1012152/chapter_notes/Ch0… ·...
C H
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Prepared by: Fernando QuijanoPrepared by: Fernando Quijanoand Yvonn Quijanoand Yvonn Quijano
© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair
The Economic Problem: Scarcity and Choice
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2 of 40© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair
Scarcity, Choice, and Opportunity Cost
• Human wants are unlimited, but resources are not.
• Three basic questions must be answered in order to understand an economic system:
• What gets produced?
• How is it produced?
• Who gets what is produced?
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3 of 40© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair
Scarcity, Choice, and Opportunity Cost
• Every society has some system or mechanism that transforms that society’s scarce resources into useful goods and services.
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4 of 40© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair
Scarcity, Choice, and Opportunity Cost
• Capital refers to the things that are themselves produced and then used to produce other goods and services.
• The basic resources that are available to a society are factors of production :
• Land
• Labor
• Capital
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Scarcity, Choice, and Opportunity Cost
• Production is the process that transforms scarce resources into useful goods and services.
• Resources or factors of production are the inputs into the process of production; goods and services of value to households are the outputsof the process of production.
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6 of 40© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair
Scarcity and Choicein a One-Person Economy
• Nearly all the basic decisions that characterize complex economies must also be made in a single-person economy.
• Constrained choice andscarcity are the basic concepts that apply to every society.
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7 of 40© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair
Scarcity and Choicein a One-Person Economy
• Opportunity cost is that which we give up or forgo, when we make a decision or a choice.
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8 of 40© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair
Scarcity and Choicein an Economy of Two or More
• A producer has an absolute advantage over another in the production of a good or service if it can produce that product using fewer resources.
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9 of 40© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair
Scarcity and Choicein an Economy of Two or More
• A producer has a comparative advantage in the production of a good or service over another if it can produce that product at a lower opportunity cost.
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10 of 40© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair
Comparative Advantageand the Gains From Trade
• Colleen has an absolute advantage in the production of both wood and food because she can produce more of both goods using fewer resources than Bill.
Daily Production
84Bill
1010Colleen
Food(bushels)
Wood(logs)
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11 of 40© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair
Comparative Advantageand the Gains From Trade
• In terms of wood:
• For Bill, the opportunity cost of 8 bushels of food is 4 logs.
• For Colleen, the opportunity cost of 8 bushels of food is 8 logs.
• In terms of food:
• For Colleen, the opportunity cost of 10 logs is 10 bushels of fo od.
• For Bill, the opportunity cost of 10 logs is 20 bushels of food.
Daily Production
84Bill
1010Colleen
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Wood(logs)
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12 of 40© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair
Comparative Advantageand the Gains From Trade
• Suppose that Colleen and Bill each wanted equal numbers of logs and bushels of food. In a 30-day month they (each separately) could produce:
Daily Production
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Food(bushels)
Wood(logs)
230230Total
Monthly Production with No Trade
8080Bill
150150Colleen
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Wood(logs)
A.B.
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13 of 40© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair
Comparative Advantageand the Gains From Trade
• By specializing on the basis of comparative advantage, Colleen and Bill can produce more of both goods.
270270Total
Monthly Production after Specialization
2400Bill
30270Colleen
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Wood(logs)
C.
230230Total
Monthly Production with No Trade
8080Bill
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B.
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14 of 40© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair
Comparative Advantageand the Gains From Trade
• To end up with equal amounts of wood and food after trade, Colleen could trade 100 logs for 140 bushels of food. Then:
270270Total
Monthly Production after Specialization
2400Bill
30270Colleen
Food(bushels)
Wood(logs)
D.
270270Total
Monthly Use After Trade
100100Bill
170170Colleen
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Wood(logs)
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15 of 40© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair
Specialization, Exchangeand Comparative Advantage
• According to the theory of competitive advantage,specialization and free trade will benefit all trading parties, even those that may be absolutely more efficient producers.
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16 of 40© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair
Capital Goods and Consumer Goods
• Capital goods are goods used to produce other goods and services.
• Consumer goods are goods produced for present consumption.
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17 of 40© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair
Capital Goods and Consumer Goods
• Investment is the process of using resources to produce new capital. Capital is the accumulation of previous investment.
• The opportunity cost of every investment in capital is forgone present consumption.
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18 of 40© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair
The Production Possibility Frontier
• The production possibility frontier (ppf) is a graph that shows all of the combinations of goods and services that can be produced if all of society’s resources are used efficiently.
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19 of 40© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair
The Production Possibility Frontier
• The production possibility frontier curve has a negative slope, which indicates a trade-off between producing one good or another.
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The Production Possibility Frontier
• Points inside of the curve are inefficient.
• At point H, resources are either unemployed, or are used inefficiently.
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The Production Possibility Frontier
• Point F is desirable because it yields more of both goods, but it is not attainable given the amount of resources available in the economy.
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The Production Possibility Frontier
• Point C is one of the possible combinations of goods produced when resources are fully and efficiently employed.
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23 of 40© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair
The Production Possibility Frontier
• A move along the curve illustrates the concept of opportunity cost.
• From point D, an increase the production of capital goods requires a decrease in the amount of consumer goods.
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24 of 40© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair
The Law of Increasing Opportunity Cost
• The slope of the ppf curve is also called the marginal rate of transformation (MRT).
• The negative slope of the ppf curve reflects the law of increasing opportunity cost. As we increase the As we increase the production of one good, we production of one good, we sacrifice progressively more sacrifice progressively more of the other.of the other.
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25 of 40© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair
Economic Growth
• Economic growth is an increase in the total output of the economy. It occurs when a society acquires new resources, or when it learns to produce more using existing resources.
• The main sources of economic growth are capital accumulation and technological advances.
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Economic Growth
• An outward shift means that it is possible to increase the production of one good without decreasing the production of the other.
•• Outward shifts of the Outward shifts of the curve represent curve represent economic growth.economic growth.
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27 of 40© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair
Economic Growth
•• From point D, the From point D, the economy can choose economy can choose any combination of any combination of output between F and output between F and G.G.
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28 of 40© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair
Economic Growth
• Not every sector of the economy grows at the same rate.
• In this historic example, productivity increases were more dramatic for corn than for wheat over this time period.
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29 of 40© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair
Capital Goods and Growthin Poor and Rich Countries
• Rich countries devote more resources to capital production than poor countries.
• As more resources flow into capital production, the rate of economic growth in rich countries increases, and so does the gap between rich and poor countries.
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Economic Growthand the Gains From Trade
• By specializing and engaging in trade, Colleen and Bill can move beyond their own production possibilities.
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31 of 40© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair
Economic Systems
• The economic problem:Given scarce resources, how, exactly, do large, complex societies go about answering the three basic economic questions?
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Economic Systems
• Economic systems are the basic arrangements made by societies to solve the economic problem. They include:
• Command economies
• Laissez-faire economies
• Mixed systems
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33 of 40© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair
Economic Systems
• In a command economy, a central government either directly or indirectly sets output targets, incomes, and prices.
• In a laissez-faire economy,individuals and firms pursue their own self-interests without any central direction or regulation.
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34 of 40© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair
Economic Systems
• The central institution of a laissez-faire economy is the free-market system.
• A market is the institution through which buyers and sellers interact and engage in exchange.
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35 of 40© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair
Economic Systems
• Consumer sovereignty is the idea that consumers ultimately dictate what will be produced (or not produced) by choosing what to purchase (and what not to purchase).
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36 of 40© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair
Economic Systems
• Free enterprise: under a free market system, individual producers must figure out how to plan, organize, and coordinate the production of products and services.
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37 of 40© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair
Economic Systems
• In a laissez-faire economy, the distribution of output is also determined in a decentralized way. The amount that any one household gets depends on its income and wealth.
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38 of 40© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair
Economic Systems
• The basic coordinating mechanism in a free market system is price. Price is the amount that a product sells for per unit. It reflects what society is willing to pay.
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39 of 40© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair
Mixed Systems,Markets, and Governments
Since markets are not perfect, governments intervene and often play a major role in the economy. Some of the goals of government are to:
• Minimize market inefficiencies
• Provide public goods
• Redistribute income
• Stabilize the macroeconomy:
• Promote low levels of unemployment
• Promote low levels of inflation
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Review Terms and Concepts
absolute advantageabsolute advantage
capitalcapital
command economycommand economy
comparative advantage, comparative advantage, theory oftheory of
consumer goodsconsumer goods
consumer sovereigntyconsumer sovereignty
economic growtheconomic growth
economic problemeconomic problem
investmentinvestment
laissezlaissez--faire economyfaire economy
marginal rate of transformation (marginal rate of transformation (mrtmrt))
marketmarket
opportunity costopportunity cost
outputsoutputs
priceprice
productionproduction
production possibility frontier (ppf)production possibility frontier (ppf)
resources or inputsresources or inputs
three basic questionsthree basic questions
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