The Economizing Problem Resources are limited (scarce) Wants are unlimited (insatiable)

Resource Categories Resources are also called “factors of production” 1. Land – all natural resources “gifts of nature” arable land, forests, oil, etc. 2. Capital – manufactured aids to production tools, machinery, factories, trucks, technology Money is not considered capital

Capital (cont.) Capital goods v Consumer goods Consumer goods satisfy human wants directly while capital goods aid in the production of consumer goods and other capital goods To economists investment refers to the purchase of capital goods. Land and capital are both property resources while labor and entrepreneurial ability are human resources

3. Labor 4. Entrepreneurial Ability (also called enterprise) –four factors separate the entrepreneur from traditional labor -takes the initiative

Entrepreneur (cont.) -makes policy decisions -source of innovation- -risk bearer – no guarantee of profit

Resource Payments Land  Rent Capital  Interest Labor Wages Entrepreneur Profit

Production Possibilities Model There are four assumptions in this model 1. Full Employment 2. Fixed Resources 3. Fixed Technology 4. Two Goods – usually one capital good and one consumer good

Production Possibilities Table Possible combinations of Pizza and Robots Pizza 0 1 2 3 4 Robots 10 9 7 4 0 At any point in time a full employment, full production economy must sacrifice some of product X to get more of product Y

Production Possibilities Curve Graph Producing outside the curve is unattainable. Producing inside the curve is attainable but undesirable

Law of Increasing Opportunity Costs As production of a particular good increases, the opportunity cost of producing an additional unit rises. Rationale – Resources are not completely adaptable to alternative uses. This explains why the PPF curve is concave (bows out from the origin

Optimal Allocation What combination of Pizza and Robots should be produced? Optimal output occurs where marginal cost = marginal benefit. MB declines as output increases while MC increases Graph

Economic Growth and PPF The growth of economic capacity can be depicted as an outward shift in PPF. Increases in resource supplies and improvements in technology are two factors that enable a PPF to shift outward. PPF may contract (war, natural disaster)

Present Choices Impact the Future A production alternative favoring capital goods will enable the economy to grow more in the future as compared to an alternative favoring consumer goods.