The Concept of Opportunity CostOpportunity Cost and SocietyProduction Possibilities Frontiers (PPF)Figure 1: The Production Possibilities FrontierIncreasing Opportunity CostFigure 2: Production and UnemploymentEconomic GrowthFigure 3: The Effect of a New Technology to Produce ChocolateResource AllocationThe Three Methods of Resources AllocationThe Nature of MarketsThe Importance of PricesResource OwnershipTypes of Economic SystemsFigure 4: Types of Economic SystemsHall & Leiberman; Economics: Principles And Applications, 2004 1The Concept of Opportunity Cost•Opportunity cost of any choice –What we forego when we make that choice•Most accurate and complete concept of cost•Opportunity cost of a choice includes both explicit costs and implicit costs–Explicit cost—dollars actually paid out for a choice–Implicit cost—value of something sacrificed when no direct payment is madeHall & Leiberman; Economics: Principles And Applications, 2004 2Opportunity Cost and Society•All production carries an opportunity cost–To produce more of one thing•Must shift resources away from producing something elseHall & Leiberman; Economics: Principles And Applications, 2004 3Production Possibilities Frontiers (PPF)•Curve showing all combinations of two goods that can be produced with resources and technology available•Society’s choices are limited to points on or inside the PPFHall & Leiberman; Economics: Principles And Applications, 2004 4Figure 1: The Production Possibilities FrontierQuantity of chocolate per PeriodQuantity of corn per Period100,000 200,000 300,000 400,000 500,0001,000,000950,000850,000700,000500,000400,000BACDEFWAt point A, all resources are used for cornMoving from point A to point B requires shifting resources out of corn and into chocolate.At point F. all resources are used for chocolate.Hall & Leiberman; Economics: Principles And Applications, 2004 5Increasing Opportunity Cost•According to law of increasing opportunity cost–The more of something we produce•The greater the opportunity cost of producing even more of it•This principle applies to all of society’s production choicesHall & Leiberman; Economics: Principles And Applications, 2004 6Figure 2: Production and UnemploymentABCivilian Goods per PeriodMilitary Goods per Period2. then moved to the PPF during the war. Both military and civilian production increased.1. Before WWII the United States operated inside its PPF . . .Hall & Leiberman; Economics: Principles And Applications, 2004 7Economic Growth•If economy is already operating on its PPF–Cannot exploit opportunity to have more of everything by moving to it•But what if the PPF itself were to change? Couldn’t we then produce more of everything? –This happens when an economy’s productive capacity grows•Many factors contribute to economic growth, but they can be divided into two categories–Quantities of available resources–Technological change enables us to produce more from a given quantity of resourcesHall & Leiberman; Economics: Principles And Applications, 2004 8Figure 3: The Effect of a New Technology to Produce ChocolateQuantity of chocolate per PeriodQuantity of corn per period300,000 500,000 600,0001,000,000700,000AJDHFMore corn AND More chocolateSame corn+ More chocolateF'Hall & Leiberman; Economics: Principles And Applications, 2004 9Resource Allocation•Problem of resource allocation–Which goods and services should be produced with society’s resources?•Where on the PPF should economy operate?–How should they be produced?•No capital at all•Small amount of capital•More capital–Who should get them?•How do we distribute these products among the different groups and individuals in our society?Hall & Leiberman; Economics: Principles And Applications, 2004 10The Three Methods of Resources Allocation•Traditional Economy–Resources are allocated according to long-lived practices from the past•Command Economy (Centrally-Planned)–Resources are allocated according to explicit instructions from a central authority •Market Economy–Resources are allocated through individual decision makingHall & Leiberman; Economics: Principles And Applications, 2004 11The Nature of Markets•A market is a group of buyers and sellers with the potential to trade with each other–Global markets•Buyers and sellers spread across the globe–Local markets•Buyers and sellers within a narrowly defined areaHall & Leiberman; Economics: Principles And Applications, 2004 12The Importance of Prices•A price is the amount of money that must be paid to a seller to obtain a good or service•When people pay for resources allocated by the market–They must consider opportunity cost to society of their individual actions•Markets can create a sensible allocation of resourcesHall & Leiberman; Economics: Principles And Applications, 2004 13Resource Ownership•Communism–Most resources are owned in common•Socialism–Most resources are owned by state•Capitalism–Most resources are owned privatelyHall & Leiberman; Economics: Principles And Applications, 2004 14Types of Economic Systems•An economic system is composed of two features–Mechanism for allocating resources•Market•Command –Mode of resource ownership•Private•StateHall & Leiberman; Economics: Principles And Applications, 2004 15Figure 4: Types of Economic SystemsResource AllocationMarket CommandPrivateStateResource OwnershipMarket CapitalismCentrally Planned CapitalismCentrally Planned SocialismMarket
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