Macroeconomics For Today - Chapter 2Three Fundamental Economic Questions What to Produceo The problem of scarcity restricts our ability to produce everything we want during a given period, so the choice to produce “more” of one good requires producing “less” of another.o In the USA, consumer sovereignty answers this question. How to Produceo This question asks whether a production technique will be more or less capital-intensive and also concerns choices among resources for production.o Education also plays an important role; variation in the quality and quantity of education among nations is one reason economies differ in their capacities to apply resources and technology to answer this question. For Whom to Produceo Among all those desiring the produced goods, who actually receives them?o This question means that society must have a method to decide who will be “rich and famous” and who will be “poor and unknown.”Opportunity Cost Opportunity Cost – the best alternative sacrificed for a chosen alternative; the cost of not choosing the next best alternativeo Principle: some highly valued opportunity must be forgone in all economic decisionsMarginal Analysis Marginal Analysis – an examination of the effects of additions to or subtractions from a current situationo The rational decision maker decides on an option only if the marginal benefit exceeds the marginal cost.o This is an important concept when the gov. considers changes in various programs; an increase in the production of military goods will result in anopportunity cost of fewer consumer goods produced.The Production Possibilities Curve Production Possibilities Curve – a curve that shows the maximum combinations of two outputs an economy can produce in a given period of time with its available resources and technology.o Fixed Resources – the quantities and qualities of all resource inputs remain unchanged during the time period, but the rules do not allow an economy to shift any resource from the production of one output to the production of another output. Example: An economy might shift workers from producing consumer goods to capital goods. Although the number of workersremains unchanged, this transfer of labor will produce fewer consumer goods and more capital goods.o Fully Employed Resources – the economy operates with all its factors of production fully employed and producing the greatest output possible without waste or mismanagement.o Technology Unchanged – holding existing technology fixed creates limits, or constraints, on the amounts and types of goods an economy can produce Technology – the body of knowledge applied to how goods are produced.o Inefficient Points – any point below the PPC, which represents an economy operating without all its resources fully employed.o Unattainable Points – any point above the PPC, which represents that it isbeyond the economy’s present production capabilities. Scarcity limits an economy to points on or below its PPC.o Efficient Points – all points along the PPC, which are the maximum outputlevels with the given resources and technology. The PPC consists of all efficient output combinations at which an economy can produce more of one good only by producing less of another.The Law of Increasing Opportunity Cost Law of Increasing Opportunity Cost – the principle that the opportunity cost increases as production of one output expands.o Holding the stock of resources and technology constant, the law of increasing opportunity cost causes the PPC to display a bowed-out shape. If this was not the case, it would be a straight line.o The lack of interchangeability between workers is the cause of increasingopportunity costs and the bowed-out shape of the PPC.Sources of Economic Growth Economic Growth – the ability of an economy to produce greater levels of output, represented by an outward shift of its PPC. Changes in Resourceso Gaining additional resources is one way to increase economic growth; reductions in resources, however, will shrink the PPC. Technological Changeo Another way to achieve economic growth is through research and development of new technologies.o One source of technological change is inventiono The innovation of entrepreneurship also comes from technological change.Present Investment and the Future Production Possibilities Curve Investment – the accumulation of capital, such as factories, machines, and inventories used to produce goods and services.o When the decision for an economy involves choosing between capital goods and consumer goods, the output combination for the present period can determine future production capacity.o A nation can accelerate economic growth by increasing its production of capital goods in excess of the capital being worn out in the production process. The problem is that sacrificing consumer goods for capital formation causes the standard of living to