Chapter 2 Confronting Scarcity Choice in production Production possibilities model shows the goods and services that an economy is capable of producing its opportunities given the factors of production and the technology it has available o a graphical representation of the alternative combinations of goods and services an economy can produce o describes opportunity costs and tradeoffs Economic system set of rules that define how an economy s resources are to be owned and how decisions about their use are to be made Factors of production resources available to the economy for the production of goods and services Utility value or satisfaction that people derive from the goods and services they consume and the activities they pursue Labor human effort that can be applied to the production of goods and services o Human capital skills a worker has as a result of education training or experience that can be used in production Capital factor of production that has been produced for use in the production of other goods and services o Financial capital includes money and other paper assets such as stocks and bonds that represent claims on future payments o Tools such as hammers screwdfrivers and wrenches are also capital Natural resources the resources of nature that can be used for the production of goods and services The following play a crucial role in putting factors of production to work o Technology the knowledge that can be applied to the production of goods and services o Entrepreneur person who operating within the context of a market economy assumes various risks in the hopes of earning profits by finding new ways to organize factors of production Comparative advantage in producing a good or service is the situation that occurs if the opportunity costs of producing that good or service is lower for that economy than for any other Law of increasing opportunity cost states that as an economy moves along its production possibilities curve in the direction of producing more of a particular good the opportunity cost of additional units of that good will increase We can use the PP model to examine choices in the production of goods and services In applying the model we assume that o The economy can produce two goods o Technology and the factors of production available to the economy remain unchanged Two things could leave an economy operating at a point inside its PPC o The economy might fail to use fully the resources available to it o It might not allocate resources on the basis of comparative advantage In either case production within the PPC implies the ecnomy could improve its performance Specialization a situation In which an economy is producing the goods and services in which it has a comparative advantage The most important implications of the concepts of comparative advantage and the PPC relates to international trade An increase in the physical quantity or in the quality of factors of production available to an economy or a technological gain will allow the economy to produce more goods and services o It will shift the economy s PPC outward Economic growth The process through which an economy achieves an outward shift in its PPC Market capitalist economy economy in which resources are generally owned by private individuals who have the power to make decisions about their use Command socialist economy centrally planned economy in which govt is the primary owner of capital and natural resources and has broad power to allocate the use of factors of production Mixed economy economy that combines elements of market capitalist and command socialist economic systems In a market economy interactions of individual buyers and sellers determine where on a PPC an economy will produce Government plays a role as well consumption of others o It make seek to encourage greater consumption of some goods and discourage
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