Chapter 2 - Confronting Scarcity: Choices in Production Read pages 38-57 I Basics of Production

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Chapter 2 - Confronting Scarcity Choices in
Production
Read pages 38-57I Basics of Production

• A) Terminology
• 1) The production possibilities models shows the
  goods and services that an economy is capable of
  producing given the factors of production and the
  technology it has available.

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• 2) An economic system is the set of rules that
  define how an economys resources are to be owned
  and how decisions about their use are to be made.
• 3) A factor of production is a resource available
  for the production of goods and services Labor,
  capital and natural resources
• 4) Labor is the human effort that can be applied
  to the production of goods and services. It
  consists of two parts Raw time and the skill
  level of the workers known as human capital.

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• 5) Capital is a factor that has been produced for
  use in the production of other goods and
  services. It can include physical goods
  (machines) and intellectual discoveries
  (mathematics, computer software).
• 6) Financial capital are money or other paper
  assets that represent claims on future payments.
  It is not regarded as a factor of production.
• 7) Natural resources are the resources of nature
  that can be used for the production of goods and
  services.

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• 8) Technology is the knowledge that can be
  applied to the production of goods and services.
• 9) An entrepreneur is a person who seeks to earn
  profits by finding new ways to organize factors
  of production.

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II The Production Possibilities Curve

• A) We illustrate this curve with an example.
  Consider an entrepreneur who has three factories
  which can produce skis or snowboards. Each
  factory has a slightly different floor plan and
  equipment creating some differences in their
  abilities to produce the two products.

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• From this example we see that the slope of the
  three production possibilities curves differ with
  plant 1 being steepest with slope of 2, next is
  plant 2 with slope of 1 and finally plant 3 with
  slope of ½. These slopes represent the
  opportunity costs of producing another snowboard
  in each plant. In particular, the cost of
  another snowboard in plant 1 is 2 pairs of skis,
  in plant 2 it is 1 pair of skis and in plant 3 it
  is ½ a pair.

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• B) More Terminology
• Economists say that an economy has a comparative
  advantage in producing a good or service if the
  opportunity cost of producing that good or
  service is lower for that economy than for any
  other.
• The law of increasing opportunity cost holds 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.

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• C) Producing on versus producing inside the
  production possibilities curve
• If all the factors of production that are
  available for use under current market conditions
  are being utilized, the economy has achieved full
  employment.
• When an economy is operating on its production
  possibilities curve, we say that it is engaging
  in efficient production.
• If it is inside its production possibilities
  curve, its production is inefficient.

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• D) Specialization
• 1) Specialization implies that an economy is
  producing goods and services in which it has a
  comparative advantage.

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III Economic Growth

• A) The process through which an economy achieves
  an outward shift in its production possibilities
  curve is called economic growth.

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• B) Factors influencing economic growth
• Anything that increases the quantity or quality
• of the factors of production.
• Increase in the quantity of labor.
• Increase in the quantity of capital.
• Increase in human capital.
• Improved technologies.

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• C) A comparison of Economic Systems
• A market economy is one in which the resources
  are generally owned by private individuals who
  have the power to make decisions about their use.
• A command socialist economy is one in which the
  government is the primary owner of capital and
  natural resources and has broad power to allocate
  the use of the factors of production.
• A mixed economy has elements of both types of
  systems.

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• D) Government role in a market economy
• At a minimum, it should provide the laws to allow
  private ownership and policing institutions to
  enforce those laws.
• May want to provide some goods which the market
  is not likely to provide on its own in efficient
  quantities.
• May want to restrict some markets.

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• IV Some sample questions.
• as the average level of education in the United
  States increases,
• the United States production possibilities curve
  shifts inward.
• the technology used to produce goods and services
  improves.
• usage of natural resources increases.
• workers possess greater human capital.

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The answer is d).
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• 2) Which of the following will not lead to an
  outward shift in a countrys production
  possibilities curve?
• The discovery and exploitation of a new oil
  field.
• The introduction of computers into the production
  process.
• A reduction in sales taxes.
• The establishment of several new factories.

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The answer is c).