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Confronting Scarcity:
Choices in Production
•
•
The Production possibilities model is
a model that shows the goods and
services that an economy is capable of
producing – its opportunities – given the
factors of production and the technology
it has available.
An economic system is the set of rules
that define how an economy’s resources
are to be owned and how decisions
about their use are to be made.
1. FACTORS OF PRODUCTION
Learning Objectives
1. Define the three factors of production– labor,
capital, and natural resources.
2. Explain the role of technology and
entrepreneurs in the utilization of the
economy’s factors of production.
1. FACTORS OF PRODUCTION
• Factors of production (land, labor,
capital, and entrepreneurship) are
the resources available to the
economy for the production of goods
and services.
• Utility is the value, or satisfaction,
that people derive from the goods
and services they consume and the
activities they pursue.
1. FACTORS OF PRODUCTION
•
Labor is the human effort that can be applied to the production
of goods and services.
Capital is a factor of production that has been produced for use
in the production of other goods and services.
•
–
–
•
•
Financial capital includes money and other “paper “ assets (such
as stocks and bonds) that represent claims on future payments.
Physical capital includes tools of production such as tractors for
farming, screwdrivers, hammers, roads, and bridges.
Natural resources are the resources of nature that can be used
for the production of goods and services.
Human capital are the skills a worker has as a result of
education, training, or experience that can be used in
production.
1.4 Technology and the
Entrepreneur
• Technology is the knowledge that can
be applied to the production of goods
and services.
• An Entrepreneur is a person who,
operating within the context of a market
economy, assumes various risks in the
hopes of earning profits by finding new
ways to organize factors of production.
1.4 THE PRODUCTION
POSSIBILITIES CURVE
Learning Objectives
1. Explain the concept of the production
possibilities curve and understand the
implications of its downward slope and bowedout shape.
2. Use the production possibilities model to
distinguish between full employment and
situations of idle factors of production and
between efficient and inefficient production.
3. Understand specialization and its relationship to
the production possibilities model and
comparative advantage.
1.4 THE PRODUCTION
POSSIBILITIES CURVE
• The production possibilities curve
is a graphical representation of the
alternative combinations of goods and
services an economy can produce. It
describes opportunity costs and
tradeoffs.
A Production Possibilities
Curve
Snowboards
per month
A
200
0
B
100
50
C
0
100
The table shows the
combinations of pairs of
skis and snowboards
that Plant 1 is capable of
producing each month.
These are also
illustrated with a
production possibilities
curve. Notice that this
curve is linear.
Production possibilities
curve for plant 1
A
200
Pairs of skis per month
Pairs of
skis per
month
B
100
C
0
0
50
100
Snowboards per month
Pairs of skis per month
The Slope of a Production
Possibilities Curve
Pairs of skis per month
200
B
100
0
0
50
100
Snowboards per month
The slope of the
Production possibilities
curve is constant.
105
104
103
102
101
100
99
98
97
96
95
B
-2
B’
+1
-2
B’’
+1
48
49
50
51
Snowboards per month
52
Production Possibilities at
Three Plants
A
200
Firm 1
Slope = -2
Firm 2
Slope = -1
Pairs of skis per month
175
Firm 3
Slope = -0.5
150
125
D
B
The steeper the curve, the
greater the opportunity
cost of an additional
snowboard.
100
75
G
E
50
25
H
0
0
50
C ,F ,I
100
Snowboards per month
2.2 Comparative Advantage and the
Production Possibilities Curve
A comparative
advantage in
producing a good or
service is the
situation that occurs
if the opportunity
cost of producing
that good or service
is lower for that
economy than for
any other.
A
350
Pairs of skis per month
•
300
Plant
3
B
Plant
2
250
C
200
150
The combined
production
possibilities curve for
Alpine Sports.
100
50
Plant
1
D
0
0
100
200
Snowboards per month
300
2.3 The Law of Increasing
Opportunity Cost
The 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.
S
350
Pairs of skis per month
•
As we combine the
production
possibilities curves
for more and more
units, the curve
becomes smoother.
300
250
200
150
100
The production
possibilities curve
for ten plants.
50
0
0
200
Snowboards per month
T
400
Movements along the Production
Possibilities Curve
Security
Increased spending on security
requires less spending on other
goods and services.
SB
This economy initially starts
at point A on the production
possibilities curve.
B
A
SA
OB
OA
All other goods and services
2.5 Producing on Versus Producing Inside
the Production Possibilities Curve
Inefficient.
Unattainable.
D
Security
FD
A
FA
FB
Efficient.
B
CB
CA
CD
All other goods and services
Efficient versus Inefficient
Production
A
350
B
Pairs of skis per month
300
Efficient
production
250
C
200
150
B’
100
Inefficient
production
50
C’
D
0
0
100
200
Snowboards per month
300
Production Possibilities
Curves and Trade
South America Production Possibilities
Computers
Food per
A
200
0
B
100
200
C
0
400
600
500
Food
D
400
0
E
200
100
F
0
200
Price per pound
Europe’s Production Possibilities
Computers
D
400
H
Q
300
A
E
200
B
World Production Possibilities
Computers
Food
G
600
0
H
400
400
I
0
600
World
production with
trade.
World
production with
no trade.
G
100
0
0
100
200
I
C
F
300
400
500
Quantity (millions of pounds per month)
600
Economic Growth and the Production
Possibilities Curve
S
Unattainable with initial levels
of inputs and technology.
Q
N
M
R
T
Sources of U.S. Economic Growth,
1948-2002
A comparison of Economic systems
•
•
•
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 government 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.
A comparison of Economic systems
3.4 Government in a Market
Economy
•
In a market economy interactions of
individual buyers and sellers determine
where on a production possibilities curve an
economy will produce.
• Governments also intervene in economies
to change how, what, and for whom an
economy produces.
– Tax, expenditure, and redistribution
policies encourage production and
consumption of some goods and
discourage others (e.g. cigarettes,
homes, education, national defense)