1. Chapter 2 Confronting Scarcity: Choices in Production

2. Review What is the economic way of thinking?
Scarcity forces us to choose and economists analyze opportunity costs when analyzing choices
People are motivated to maximize their self interest
Individuals maximize choices by engaging in marginal decision making

3. Factors of Production
Definition: resources available to an economy for the production of goods and services
Factors of production (FOP) create utility.
Utility is the value or satisfaction that people derive from the goods or services they consume

4. Factors of Production
Land (natural resources)-resources of nature that can be used in the production of goods and services
Must be found in nature
Expansion occurs through:
Discovery of more
Discovery of new use
New ways of extraction

5. Factors of Production Labor-human factor in production Natural ability
Human capital
Increase labor through
Increasing number of people available
Increasing human capital

6. Factors of Production
Capital-resources produced for use in the production of goods and services
Resource must have been produced
Resource can be used to produce other goods and services
THIS DOES NOT MEAN FINANCIAL CAPITAL (money)

7. Factors of Production
Entrepreneurs change the way that the factors of production are used by putting new technologies to work
Entrepreneur person who seeks to earn profits by finding new ways to organize the factors of production (sometimes classified as the fourth factor of production)
Technology knowledge that can be applied to production of goods and services

8. Case in Point: Technology Cuts Costs, Boosts Productivity and Profits
Read p. 41
Who are the winners and losers from technology?
Consumers
Producers
Workers

9. Land, labor or capital? An unemployed factory worker
A college professor
The SMCHS library
Yellowstone National Park
An untapped deposit of natural gas
The White House
A power plant

10. Production Possibilities Curve
CSU Monterey Bay built on site of Fort Ord
Shift from military use to civilian use
Definition: Model that shows goods and services that an economy is capable of producing given the factors of production and technology it has available

11. Production Possibilities Curve
Assumes that only two goods can be produced
Any increase in one good means you can produce less of the other
Assumes that factors of production are fixed

12. Production Possibilities Curve
The PPC is downward sloping
Reflects scarcity
The PPC is bowed out
Curve gets steeper as we move from left to right
“Producing an additional good on horizontal axis requires a greater sacrifice of the good on the vertical axis than did previous units produced” (Tregarthen & Rittenberg, 2000, p. 57)

13. Production Possibilities Curve
The PPC is bowed out
The absolute value of the slope of any production possibilities curve (PPC) = the opportunity cost of an additional unit of a good on the horizontal axis
Steeper the slope, the greater the opportunity cost of producing that good
Illustrates the law of increasing opportunity cost

14. Calculating Opportunity Cost
Opportunity cost = what is given up/what is obtained
Economy can produce either 40 houses or 20 office buildings
OC of houses = 20 office buildings/40 houses=.5 office buildings
OC of office buildings = 40 houses/20 office buildings = 2 houses
Try “Try It Yourself” 2-2 on p. 49

15. Production Possibilities Curve
Law of increasing opportunity cost
As an economy moves along its PPC in the direction of increased production of one good, the opportunity cost of additional units of that good increase
Law applies because as one moves closer to one end of the curve, resources transferred from one use to the other had greater and greater comparative advantage

16. Production Possibilities Curve
Comparative advantage is when the opportunity cost of producing that good or service is lower for a particular economy than any other
International trade theory is based on comparative advantage

17. Production Possibilities Curve
Specialization implies that an economy is producing goods and services in which it has a comparative advantage
People work and use the income they earn to buy goods and services from people who have a comparative advantage in doing other things
What would life be like without specialization? Hong Kong vs. United States

18. Production Possibilities Curve
Movement along the PPC means that all factors of production are being maximized (point A)
Production within the curve means that factors of production are being used inefficiently (point B)
Idle factors of production
Inefficient production
Could increase production of both goods

19. Production Possibilities Curve
Production outside of the PPC is impossible without economic growth
Increased educational levels
Change in technology
Increased quality or quantity of labor and capital

20. Applications of the PPC Model
In order to allocate resources efficiently, then each nation should specialize in producing products for which they have a comparative advantage
Nations should trade in order to get the goods and services they need
Trade results in more production
Failure to specialize means that the world economy would be producing inside the global PPC

21. Production Possibilities and Economic Growth
An outward shift of the PPC indicates economic growth.
Economic growth raises standards of living, even in the continuing face of scarcity.
Economic growth is a sustained increase in a nation’s production of goods and services.

22. Production Possibilities and Economic Growth
The history of world economic growth raises important questions about the ability of nations to deal with the ever-present problem of scarcity.
Rich versus poor nations
Conditions that favor growth
How can growth be promoted?
How can poverty be reduced?

23. Production Possibilities and Economic Growth
Economic growth occurs through
Increases in educational levels
Changes in technology
Increases in quantity or quality of labor and capital
Innovation

24. Institutions Matter for Economic Growth