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

• 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

Two choices – buy a car or go to college

Opportunity Cost $ 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

Units of guns

16

14

12

10

8

6

4

2

AB

C

D

E

F

10

2 3 4 5 6

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

Hypothetical Production Schedule

Production Possibilities Curve

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.

As we shift from butter to guns, we have to give up increasing units of butter for each additional unit of guns

Points Inside and Outside the Production Possibilities Curve Frontier

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

Units of guns

16

14

12

10

8

6

4

2

AB

C

D

E

F

W

X

Y

1 2 3 4 5 60

Z

Where we usually are

A Recession

A Depression

Point W represents output at more than full employment and full production and is currently unattainable

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

A move from PPC to PPC to PPC represents economic growth1 32

Units of guns

15

10

5

0

PPC 1

PPC 2

PPC 3

5 10 15

Production Possibilities Curves Over Time Country A Country B

Country A represents slower economic growth than Country B

Country A capital goods is 3.8 units

Country B represents much faster economic growth than Country A

Country B capital goods is 7.0 units

Units of consumer goods

25

20

15

10

5

0

PPC 2001

PPC 1991

A.

Units of consumer goods

25

20

15

10

5

0

PPC 2001

PPC 1991

B

B.

5 10 15 5 10 15

A