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 availableo a graphical representation of the alternative combinations of goods and services an economy can produceo 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 serviceso 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 serviceso Financial capital- includes money and other “paper” assets (such as stocks and bonds) that represent claims on future paymentso 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 worko Technology- the knowledge that can be applied to the production of goods and serviceso Entrepreneur- person who, operating within the context of a market economy, assumesvarious 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 goodso Technology and the factors of production available to the economy remain unchanged- Two things could leave an economy operating at a point inside its PPCo The economy might fail to use fully the resources available to ito 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 wello It make seek to encourage greater consumption of some goods and discourage consumption of
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