Case Econ08 Ab.az.Ppt 02

7/17/2019 Case Econ08 Ab.az.Ppt 02

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2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair

Prepared by:

Fernando & YvonnQuijano

2

Chapter

The Economic Problem:Scarcity and Choice


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Chapter Outline

2The Economic Problem:

Scarcity and Choice

Scarcity, Choice, and

Opportunity CostScarcity and Choice in aOne-Person EconomyScarcity and Choice in anEconomy of Two or MoreThe Production Possibility FrontierComparative Advantageand the Gains from TradeThe Economic Problem

Economic SystemsCommand EconomiesLaissez-Faire Economies:The Free MarketMixed Systems, Markets,and Governments

Looking Ahead


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2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair of !

THE ECONOMIC PROBLEM:SCARCITY AND CHOICE

FIGURE 2.1The Three Basic Questions

Three basic questions must be answered in

order to understand an economic system:

What gets produced?

How is it produced?

Who gets what is produced?


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capitalThings that are themselvesproduced and that are then used in theproduction of other goods and services.

factors of production (or factors)Theinputs into the process of production.Another word for resources.


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productionThe process thattransforms scarce resources into usefulgoods and services.

inputsorresourcesAnything providedby nature or previous generations thatcan be used directly or indirectly tosatisfy human wants.

outputsUsable products.


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SCARCITY, CHOICE, AND OPPORTUNITY COST

SCARCITY AND CHOICE IN AONE-PERSON ECONOMY

Nearly all the same basic decisions

that characterize complex economiesmust also be made in a simpleeconomy.


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The concepts ofconstrained choiceandscarcityare central to thediscipline of economics.

Opportunity Cost


opportunity costsThe best alternativethat we give up, or forgo, when we makea choice or decision.


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SCARCITY AND CHOICE IN ANECONOMY OF TWO OR MORE

Education takes time. Timespent in the classroom hasan opportunity cost.


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Specialization, Exchange, and ComparativeAdvantage


theory of comparative advantageRicardos theory that specialization andfree trade will benefit all trading parties,even those that may be absolutely moreefficient producers.


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absolute advantageA producer has anabsolute advantage over another in theproduction of a good or service if it can

produce that product using fewerresources.

comparative advantageA producerhas a comparative advantage over

another in the production of a good orservice if it can produce that product at alower opportunity cost.


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FIGURE 2.2Comparative Advantage and the Gains from Trade


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Weighing Present and Expected Future Costsand Benefits

We trade off present and future

benefits in small ways all the time.


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Capital Goods and Consumer Goods

consumer goodsGoods produced forpresent consumption.

investmentThe process of usingresources to produce new capital.

Because resources are scarce, the opportunity cost of every investment in capital is

forgonepresent consumption.


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production possibility frontier (ppf)Agraph that shows all the combinations of

goods and services that can beproduced if all of societys resources areused efficiently.

THE PRODUCTION POSSIBILITY FRONTIER


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FIGURE 2.3Production Possibility Frontier


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Unemployment

During economic downturns orrecessions, industrial plants run at less

than their total capacity. When there isunemployment of labor and capital, weare not producing all that we can.


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Inefficiency

Waste and mismanagement are the results ofa firms operating below its potential.

Sometimes, inefficiency results frommismanagement of the economy instead ofmismanagement of individual private firms.

The Efficient Mix of Output

To be efficient, an economy must producewhat people want.


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Negative Slope and Opportunity Cost

FIGURE 2.4Inefficiency from Misallocation

of Land in Farming

marginal rate oftransformation (MRT)The slope of the productionpossibility frontier (ppf).


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TABLE 2.1 Production Possibility Schedule

for Total Corn and Wheat

Production in Ohio and Kansas

POINT

ON

PPF

TOTALCORN

PRODUCTION

(MILLIONS OF

BUSHELS PER

YEAR)

TOTALWHEAT

PRODUCTION

(MILLIONS OF

BUSHELS PER

YEAR)A 700 100

B 650 200

C 510 380

D 400 500

E 300 550

The Law of Increasing Opportunity Cost

FIGURE 2.5Corn and Wheat Production in

Ohio and Kansas


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Economic Growth

economic growthAn increase in thetotal output of an economy. It occurs

when a society acquires new resourcesor when it learns to produce more usingexisting resources.


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TABLE 2.2Increasing Productivity in Corn and Wheat Production in the United States,

19352006

CORN WHEAT

Yield Per Acre

(Bushels)

Labor Hours Per

100 Bushels

Yield Per Acre

(Bushels)

Labor Hours

Per 100 Bushels

19351939

19451949

19551959

19651969

19751979

1981198519851990

19901995

1998

2001

2006

26.1

36.1

48.7

78.5

96.3

107.2112.8

120.6

134.4

138.2

145.6

108

53

20

7

4

3NAa

NAa

NAa

NAa

NAa

13.2

16.9

22.3

27.5

31.3

36.938.0

38.1

43.2

43.5

42.3

67

34

17

11

9

7NAa

NAa

NAa

NAa

NAa


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FIGURE 2.6Economic Growth Shifts the ppf Up and to the Right


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FIGURE 2.7Capital Goods and Growth in Poor and Rich Countries

Sources of Growth and the Dilemma of thePoor Countries


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COMPARATIVE ADVANTAGE AND THEGAINS FROM TRADE

FIGURE 2.8Production Possibility Frontiers with No Trade


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FIGURE 2.9Colleen and Bill Gain from Trade

Although it exists only as an abstraction, the ppf illustrates a number of very important

concepts that we shall use throughout the rest of this book: scarcity, unemployment,

inefficiency, opportunity cost, the law of increasing opportunity cost, economic

growth, and the gains from trade.


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THE ECONOMIC PROBLEM

Recall the three basic questions facingall economic systems:

(1) What gets produced?(2) How is it produced?(3) Who gets it?

Given scarce resources, how exactlydo large, complex societies go aboutanswering the three basic economicquestions?


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ECONOMIC SYSTEMS

COMMAND ECONOMIES

command economyAn economy inwhich a central government either

directly or indirectly sets output targets,incomes, and prices.


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ECONOMIC SYSTEMS

LAISSEZ-FAIRE ECONOMIES: THE FREEMARKET

laissez-faire economyLiterally fromthe French: allow [them] to do. An

economy in which individual people andfirms pursue their own self-interestswithout any central direction orregulation.

marketThe institution through whichbuyers and sellers interact and engagein exchange.

Some markets are simple and others are complex, but they all involve buyers and sellers

engaging in exchange. The behavior of buyers and sellers in a laisse!faire economy

determines what gets produced, how it is produced, and who gets it.


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ECONOMIC SYSTEMS

consumer sovereigntyThe idea thatconsumers ultimately dictate what will be

produced (or not produced) by choosingwhat to purchase (and what not topurchase).

Consumer Sovereignty


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ECONOMIC SYSTEMS

free enterpriseThe freedom of

individuals to start and operate privatebusinesses in search of profits.

Individual Production Decisions: FreeEnterprise


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ECONOMIC SYSTEMS

Distribution of Output

The amount that any one householdgets depends on its income and wealth.

Incomeis the amount that a householdearns each year. It comes in a number offorms: wages, salaries, interest, and thelike.

Wealthis the amount that householdshave accumulated out of past incomethrough saving or inheritance.


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ECONOMIC SYSTEMS

Price Theory

"n a free market system, the basic economic #uestions are answered without the help of

a central government plan or directives. This is what the $free% in free market means&

the system is left to operate on its own, with no outside interference. "ndividuals pursuing

their own self!interest will go into business and produce the products and services

that people want. 'thers will decide whether to ac#uire skills( whether to work(

and whether to buy, sell, invest, or save the income that they earn. The basic coordinating

mechanism is price.

New businesses arise eachday and some go out ofbusiness in response toprofit opportunities andlosses.


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ECONOMIC SYSTEMS

MIXED SYSTEMS, MARKETS, ANDGOVERNMENTS

)ven staunch defenders of the free enterprise system recognie that market systems are

not

perfect. *irst, they do not always produce what people want at lowest cost&there are

inefficiencies. Second, rewards +income may be unfairly distributed, and some groups maybe left out. Third, periods of unemployment and inflation recur with some regularity.

The differences between commandeconomies and laissez-faire economies intheir pure forms are enormous. In fact,these pure forms do not exist in the world;all real systems are in some sensemixed.


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2:TheEcono

micProblem:

Scarcity

andChoice absolute advantage

capital

command economy

comparative advantage

consumer goods

consumer sovereignty

economic growth

factors of production (or

factors)free enterprise

inputs or resources

investments

laissez-faire economy

marginal rate of transformation

(MRT)

market

opportunity cost

outputs

production

production possibility frontier (ppf)theory of comparative advantage

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Case Econ08 Ab.az.Ppt 02