Download Economic Challenges Facing Business

Economic Challenges Facing
Countries & Business
PPC:
Production Possibilities Curve
Economic System:
A set of rules by which a nation
decides how to distribute its resources
to satisfy its people’s needs and wants.
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3 Basic Questions for Goods & Services:
1. Which goods and services will be produced?
2. How will these goods and services be produced?
3. How will these goods and services be distributed?
Factors of Production
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Economic Resources:
Resources that could be used to
produce or create goods
or services.
When economic resources
are actually used to produce
goods or services, they
become Factors of
Production.
4 Factors of Production:
1. Natural Resources:
2. Human Resources
3. Capital Resources
4. Entrepreneurial Resources
Natural Resources
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1.) Natural Resources:
Things that come from the air, water, or earth.
2 Types of Natural Resources:
A. Nonrenewable Resources:
Cannot be replaced or renewed – coal, oil, and other minerals.
B. Renewable Resources:
Can be replenished – water and plants
Human Resources
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2.) Human Resources:
People who contribute physical and
mental energy to the production process.
Human Resources are also called Labor or
Employees.
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Experts tell us that Human Resources are the
most important resource a business can have. If
treated badly, they will leave the business and
then the business cannot function.
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Treating your employees fairly is critical to the success of your
business.
Capital Resources
3.) Capital Resources:
 All the other items other than natural
resources that are used to produce goods
and services .
 This includes buildings, machines,
equipment, and tools.
 Capital Resources do not directly satisfy our
wants but are still useful and necessary for
production to occur.
 Money is not technically considered a Capital
Resource since it does not directly produce goods
and services.
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Entrepreneurial Resources
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4.)Entrepreneurship:
The initiative to
combine natural,
human, and capital
resources to produce
goods or services.
Entrepreneurs are
the people who
recognize a new want
or need and find ways
to combine resources
to fulfill that want or
need
What does scarcity force countries to do?
 Scarcity causes countries to answer the 3 basic economic
questions:
 1. Which goods & services will be produced?
 2. How will goods and services be produced?
 3. How will goods and services be distributed?
 Since resources are limited, a country cannot make every good in the
quantity its people would like as inexpensively as they may desire.
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Population and Production:
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Population:
The number of people living in an area, usually a country.
The more people a nation has, the tougher the production
decisions become.
Effects of Population Growth :
1. As population increases, the number of needs and wants
that must be fulfilled also increases.
2. As population increases, the available labor supply
increases.
Making Decisions About Production
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The resources used for one purpose cannot also be used
for something else
Example: Land used to farm cannot also be used to
build a factory.
To produce one thing we must give up another.
 What is this called?
This foregone choice is called the Opportunity Cost.
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• A Production Possibility Curve/Graph is used to measure
the trade-off a country or business makes when deciding to
produce one product over another.
• A production possibility curve is a graph which shows the different
production combinations that are possible for two goods or
services.
Production Possibility Curve
This graph shows
the number of candy
bars and gumballs a
candy company
might produce.
25
20
15
10
5
0
1
2
3
4
5
Candy Bars
Production Possibilities Frontier
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Model used to illustrate
opportunity costs
It is the line that shows
maximum combinations of
goods and/or services an
economy can produce when
all productive resources are
fully employed
Any spot on that line
represents a point at which
all the resources are being
used to produce a max
combination of two products
Represents an economy
working at its most efficient
level of production
Any point inside the line
indicates an underutilization
of resources
This graph shows the number of guns
and butter a country can produce:
Guns v. Butter
A – 100 Butter, 30 Guns
B – 50 Butter, 120 Guns
C – Overuse of resources (temporary)
D – Resources not fully employed
Gumballs
Production Possibility Curve
25
20
15
10
5
0
1
2
3
4
5
Candy Bars
The x-axis is the horizontal axis.
It represents one good, candy bars.
The y-axis is the vertical axis.
It represents another good, gumballs.
Let’s look a little closer at how this works.
gumballs
Production Possibility Curve
25
20
15
10
5
0
Look at the red dots.
1
2
3
What is the maximum number of Gumballs which
can be produced? 25
4
5
Candy Bars
What is the maximum number of candy bars which can be produced?
Can we produce the maximum number of both goods? NO
5
gumballs
Production Possibility Curve
25
20
15
10
5
0
Why can’t we produce
the maximum of both goods?
Look at the green dot
1
2
3
4
5
Candy Bars
If the maximum amount of one good is
produced, then none of the other good
can be produced.
If 5 candy bars are made, then 0 gumballs can be made.
If 25 gumballs are made, then 0 candy bars can be made.
gumballs
Production Possibility Curve
25
20
15
10
5
0
1
2
3
4
5
Candy
Bars
We can make any combination of goods which lies along the blue sloping line on
the graph.
We look for common points along the line for both products.
Let’s look at some possibilities.
gumballs
Production Possibility Curve
25
20
15
10
5
0
1
2
3
4
5
2
We go up the y-axis to 15 gumballs and across to the line.
The red dot shows that if we make 15 gumballs then we only have the
resources left to make 2 candy bars.
Candy
Bars
gumballs
Production Possibility Curve
25
20
15
10
5
0
1
2
3
4
5
Candy
Bars
Now, how many gumballs can we make? 5
We go across the x-axis to 4 candy bars and up to the line. The red dot shows
that we can make only 5 gumballs
gumballs
Production Possibility Curve
25
20
15
10
5
0
Candy
How many gumballs do we lose if we make 4 candy Bars
bars instead of 2? 10
Look at the red dots
1
2
AT, 2 candy bars, we make 15 gumballs
AT, 4 candy bars, we make 5 gumballs
3
4
5
15
-5
10
WE lose 10 gumballs: law of increasing costs (opportunity cost increases)
gumballs
Production Possibility Curve
25
20
15
10
5
0
1
2
How do we decide which is
better, 2 or 4 candy bars?
3
4
5
Candy
Bars
How do we decide which is better, 2 or 4
candy bars?
The answer is……
We can’t, not just yet.
We would need more information.
It’s the same way for companies and countries.
They will look at many factors such as:
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the cost of the ingredients for each product,
how many of each item they can sell,
how much they can charge for each product,
how many workers or machines are needed for each.
Business can be very complex.
Using the Production Possibilities Frontier
The production possibilities frontier (PPF) is a useful tool for understanding economic
choices made by societies. It is also a useful model for understanding economic growth.
The PPF is a graph that shows how a country might allocate scarce resources in its
production of goods and services.
For simplicity, the model shows the production of two types of goods and services—
defense goods (military goods and services produced for national defense; for example,
tanks, satellites, and warplanes)
and civilian goods (goods and services produced for consumption for nonmilitary
purposes; for example, cars, education, and medical care)—we might draw a graph that
looks like Figure 1.
Frontier:
Represents the max quantity of defense goods and civilian goods the economy can produce
with its currently available resources.
Economic resources:
• Land (natural resources)
• Labor (workers)
• Capital (goods used to produce other goods and services)
For Example:
• This society might choose
to allocate resources in a
combination reflected by
point “B”
• Which shows a large
quantity of defense goods
produced (11 units)
• And a much smaller
quantity of civilian goods
produced (5units)
• This society would enjoy
a greater sense of
security but have fewer
goods and services
available for consumption
by its civilian population
Or,
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The society might choose to
produce the combination
reflected by point “D”
Which shows a larger quantity
of civilian goods (11units)
And a much smaller quantity of
defense goods (5 units)
Now, the society has chosen to
forgo some national security in
exchange for a higher
consumption of civilian goods.
In both cases, when society is producing on
the “frontier”!
It indicates that the society is using all its available resources and
producing at an efficient level
Alternatively, the society might choose point
“A”
• This indicates a much smaller production of both defense goods and civilian goods
(5 units each)
• The choice of a point inside the PPF shows the resources in the economy are
underutilized
• Society is using fewer resources than optimal
• This might occur during
an economic recession
when some factories sit
idle
• And/or some workers
are unemployed
PPF is useful to visualize the economic concepts of Scarcity and Opportunity cost
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Imagine a society that chooses point “D” as
its current allocation of resources between
defense goods and civilian goods
If this society decides more security is needed
(greater spending on defense goods by moving
to point B)
Then, this choice would require giving up 6
units of civilian goods.
Why?
Because of Scarcity
The resources used to produce defense goods
are not available for the production of civilian
goods
The civilian goods given up as a result of this
choice constitute an opportunity cost –
The value of the next best alternative when a
decision is made; it’s what is given up
Economic Growth means more of both
goods:
• In the model that we’ve
been looking at, we learned
that the frontier represents
maximum production with
current resources.
• In this case, when we are
looking at an economy’s
production of goods and
services – production point
“E” is not possible with
current resources
The frontier itself can shift outward (to the
right and up)
This shift represents economic growth that creates
• Rising opportunities,
• Living standards
• And incomes for people
The shift can be a
result from increases in
inputs and outputs
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The increase in inputs
is simply an increase in
the # of available
resources
More land (natural
resources)
Labor
Or, capital
Outputs - Sustainable
long-run growth is the
result of better use of
existing land, labor and
capital through
technological progress
and innovation
The outward shift of the frontier made
possible by economic growth makes
production at point “E” possible
During recessions, the economy may operate with an above-average
number of unemployed people.
That is, when the economy is operating below its productive capacity;
this is indicated by a point inside the PPF, such as point “A”
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Monetary policies leading to lower interest rates or fiscal
policies—such as tax cuts or increases in government
spending—designed to push the economy back toward the PPF
might be used in recessions to move the economy back toward
its potential, such as point “B.”
This move toward the economy’s potential is often referred to
as economic expansion.
The Difference between Economic
Expansion and Long-run Economic Growth:
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Economic expansion moves
production capacity toward the
previously established PPF
Economic growth shifts the PPF
outward
This makes the production at point
“C” possible
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Lower interest rates, tax cuts, and increases in
government spending can be used to support economic
expansion
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But, Economic Growth that shifts the PPF is a result of
increases in resources and productivity and is supported
by economic institutions that promote growth