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2 THE ECONOMIC
PROBLEM
when pizza production is relatively large will require society to devote to pizza production
those resources that are less suited to making pizza and more suited to making smartphones.
This reallocation of resources yields a relatively small increase in pizza output for a large
decrease in smartphone output, creating a relatively high opportunity cost reflected in the
steep slope of the PPF over this range of output. The opportunity cost of pizza production
increases with the quantity of pizza produced as the slope of the PPF becomes ever steeper.
This effect creates the bowed-out effect and means that as more of a good is produced, the
opportunity cost of producing additional units increases.
Page 39
1. What is marginal cost? How is it measured?
Marginal cost is the opportunity cost of producing one more unit of a good or service. The
magnitude of the slope of the PPF is the marginal cost of a unit of the good measured on the
x-axis. As the magnitude of the slope changes moving along the PPF, the marginal cost
changes.
2. What is marginal benefit? How is it measured?
The marginal benefit from a good or service is the benefit received from consuming one more
unit of it. It is measured by what an individual is willing to give up (or pay) for an additional
unit.
3. How does the marginal benefit from a good change as the quantity produced of
that good increases?
As more of a good is consumed, the marginal benefit received from each unit is smaller than
the marginal benefit received from the unit consumed immediately before it, and is larger than
the marginal benefit from the unit consumed immediately after it. This set of results is known
as the principle of decreasing marginal benefit.
4. What is allocative efficiency and how does it relate to the production possibilities
frontier?
Allocative efficiency is a situation in which goods and services are produced at the lowest
possible cost and in the quantities that provide the greatest possible benefit. We cannot
produce more of any good without giving up some of another good that we value more highly.
The allocative efficient level of output is the point on the PPF for which marginal benefit
equals marginal cost.
5. What conditions must be satisfied if resources are used efficiently?
Resources are used efficiently when more of one good or service cannot be produced without
producing less of some other good or service that is valued more highly. This is known as
allocative efficiency and it occurs when: 1) production efficiency is achieved, and 2) the
marginal benefit received from the last unit produced is equal to the marginal cost of
producing the last unit.
Page 44
1. What gives a person a comparative advantage?
A person has a comparative advantage in an activity if that person can perform the activity at
a lower opportunity cost than anyone else. If the person gives up the least amount of other
goods and services to produce a particular good or service, the person has the lowest
opportunity cost of producing that good or service.
2. Distinguish between comparative advantage and absolute advantage.
A person has a comparative advantage in an activity if that person can perform the activity at
a lower opportunity cost than anyone else. A person who is more productive than others has
an absolute advantage. Absolute advantage involves comparing productivities—production
per hour—and comparative advantage involves comparing opportunity costs.
3. Why do people specialize and trade?
People can compare consumption possibilities from producing all goods and services through
self-sufficiency against specializing in producing only those goods and services that reflect
their comparative advantage and trading their output with others who do the same.
Consumption possibilities from specialization and trade are greater than under self-
sufficiency. So it is in people’s own self-interest to specialize.
4. What are the gains from specialization and trade?
From society’s standpoint, the total output of goods and services available for consumption is
greater with specialization and trade. From an individual’s perspective, each person who
specializes enjoys being able to consume a larger bundle of goods and services after trading
with others who have also specialized, than would otherwise be possible under self-
sufficiency. These increases are the gains from specialization and trade for society and for
individuals.
5. What is the source of the gains from trade?
As long as people have different opportunity costs of producing goods or services, total output
is higher with specialization and trade than if each individual produced goods and services
under self-sufficiency. This increase in output that arises from divergent opportunity costs is
the gains from trade.
6. Why do specialization and the gains from trade make the economy’s PPF bow
outward?
Initially, a good is produced by the producers with the lowest opportunity costs of production.
But as more and more of the good is produced, producers with higher opportunity costs of
production begin to produce the good. The slope of the PPF increases as producers with higher
opportunity costs begin production, giving the PPF a bowed-out shape.
7. Why is not specializing and reaping the gains from trade inefficient?
Failure to specialize and trade means that producers are not producing the good in which they
have a comparative advantage, and production occurs inside the PPF—a point of inefficiency.
All the economy’s resources are fully employed, but they are misallocated.
Page 47
1. What generates economic growth?
The two key factors that generate economic growth are technological change and capital
accumulation. Technological change is the development of new goods and of better ways of
producing goods and services. Capital accumulation is the growth of capital resources,
including human capital.
2. How does economic growth influence the production possibilities frontier?
Economic growth shifts the PPF outward.
3. What is the opportunity cost of economic growth?
When a society devotes more of its scarce resources to research and development of new
technologies, or devotes additional resources to produce more capital equipment, both
decisions lead to increased consumption opportunities in future periods at the cost of less
consumption today. The loss of consumption today is the opportunity cost borne by society for
creating economic growth.
By the President:
Abraham Lincoln.
By the President:
William H. Seward,
Secretary of State.
A. G. Curtin,
John A. Andrew,
Richard Yates,
Israel Washburne, Jr.,
Edward Solomon,
Samuel J. Kirkwood,
O. P. Morton,
By D. G. Rose, his representative,
Wm. Sprague,
F. H. Peirpoint,
David Tod,
N. S. Berry,
Austin Blair.
Repeal of the Fugitive Slave Law.
The first fugitive slave law passed was that of February 12th, 1793,
the second and last that of September 18th, 1850. Various efforts had
been made to repeal the latter before the war of the rebellion,
without a prospect of success. The situation was now different. The
war spirit was high, and both Houses of Congress were in the hands
of the Republicans as early as December, 1861, but all of them were
not then ready to vote for repeal, while the Democrats were at first
solidly against it. The bill had passed the Senate in 1850 by 27 yeas to
12 nays; the House by 109 yeas to 76 nays, and yet as late as 1861
such was still the desire of many not to offend the political prejudices
of the Border States and of Democrats whose aid was counted upon
in the war, that sufficient votes could not be had until June, 1864, to
pass the repealing bill. Republican sentiment advanced very slowly in
the early years of the war, when the struggle looked doubtful and
when there was a strong desire to hold for the Union every man and
county not irrevocably against it; when success could be foreseen the
advances were more rapid, but never as rapid as the more radical
leaders desired. The record of Congress in the repeal of the Fugitive
Slave Law will illustrate this political fact, in itself worthy of grave
study by the politician and statesman, and therefore we give it as
compiled by McPherson:—
[22]
Second Session, Thirty-Seventh Congress.
REPEALING BILLS.
1864, April 19, the Senate considered the bill to repeal all acts for
the rendition of fugitives from service or labor. The bill was taken up
—yeas 26, nays 10.
Mr. Sherman moved to amend by inserting these words at the end
of the bill:
Except the act approved February 12, 1793, entitled “An act
respecting fugitives from justice, and persons escaping from the
service of their masters.”
Which was agreed to—yeas 24, nays 17, as follows:
Yeas—Messrs. Buckalew, Carlile, Collamer, Cowan, Davis, Dixon,
Doolittle, Foster, Harris, Henderson, Hendricks, Howe, Johnson,
Lane of Indiana, McDougall, Nesmith, Powell, Riddle, Saulsbury,
Sherman, Ten Eyck, Trumbull, Van Winkle, Willey—24.
Nays—Messrs. Anthony, Brown, Clark, Conness, Fessenden,
Grimes, Hale, Howard, Lane of Kansas, Morgan, Morrill, Pomeroy,
Ramsey, Sprague, Sumner, Wilkinson, Wilson—17.
Mr. Saulsbury moved to add these sections:
And be it further enacted, That no white inhabitant of the United
States shall be arrested, or imprisoned, or held to answer for a
capital or otherwise infamous crime, except in cases arising in the
land or naval forces, or in the militia when in actual service in time of
war or public danger, without due process of law.
And be it further enacted, That no person engaged in the
executive, legislative, or judicial departments of the Government of
the United States, or holding any office or trust recognized in the
Constitution of the United States, and no person in military or naval
service of the United States, shall, without due process of law, arrest
or imprison any white inhabitant of the United States who is not, or
has not been, or shall not at the time of such arrest or imprisonment
be, engaged in levying war against the United States, or in adhering
to the enemies of the United States, giving them aid and comfort, nor
aid, abet, procure or advise the same, except in cases arising in the
land or naval forces, or in the militia when in actual service in time of
war or public danger. And any person as aforesaid so arresting, or
imprisoning, or holding, as aforesaid, as in this and the second
section of this act mentioned, or aiding, abetting, or procuring, or
advising the same, shall be deemed guilty of felony, and, upon
conviction thereof in any court of competent jurisdiction, shall be
imprisoned for a term of not less than one nor more than five years,
shall pay a fine of not less than $1,000 nor more than $5000, and
shall be forever incapable of holding any office or public trust under
the Government of the United States.
Mr. Hale moved to strike out the word “white” wherever it occurs;
which was agreed to.
The amendment of Mr. Saulsbury, as amended, was then
disagreed to—yeas 9, nays 27, as follows:
Yeas—Messrs. Buckalew, Carlile, Cowan, Davis, Hendricks,
McDougall, Powell, Riddle, Saulsbury—9.
Nays—Messrs. Anthony, Clark, Collamer, Conness, Doolittle,
Fessenden, Foster, Grimes, Hale, Harris, Howard, Howe, Lane of
Indiana, Lane, of Kansas, Morgan, Morrill, Pomeroy, Ramsey,
Sherman, Sprague, Sumner, Ten Eyck, Trumbull, Van Winkle,
Wilkinson, Willey, Wilson—27.
Mr. Conness moved to table the bill; which was disagreed to—yeas
9, (Messrs. Buckalew, Carlile, Conness, Davis, Hendricks, Nesmith,
Powell, Riddle, Saulsbury,) nays 31.
It was not again acted upon.
1864, June 13—The House passed this bill, introduced by Mr.
Spalding, of Ohio, and reported from the Committee on the
Judiciary by Mr. Morris, of New York, as follows:
Be it enacted, etc., that sections three and four of an act entitled
“An act respecting fugitives from justice and persons escaping from
the service of their masters,” passed February 12, 1793, and an Act
entitled “An act to amend, and supplementary to, the act entitled ‘An
act respecting fugitives from justice, and persons escaping from their
masters,’ passed February 12, 1793,” passed September 18, 1850, be,
and the same are hereby, repealed.
Yeas 86, nays 60, as follows:
Yeas—Messrs. Alley, Allison, Ames, Arnold, Ashley, John D.
Baldwin, Baxter, Beaman, Blaine, Blair, Blow, Boutwell, Boyd,
Brandegee, Broomall, Ambrose W. Clarke, Freeman Clark, Cobb,
Cole, Creswell, Henry Winter Davis, Thomas T. Daavis, Dawes,
Dixon, Donnelly, Driggs, Eckley, Eliot, Farnsworth, Fenton, Frank,
Garfield, Gooch, Griswold, Higby, Hooper, Hotchkiss, Asahel W.
Hubbard, John K. Hubbard, Hulburd, Ingersoll, Jenckes, Julian,
Kelley, Francis W. Kellogg, O. Kellogg, Littlejohn, Loan, Longyear,
Marvin, McClurg, McIndoe, Samuel F. Miller, Moorhead, Morrill,
Daniel Morris, Amos Myers, Leonard Myers, Norton, Charles O’Neill,
Orth, Patterson, Perham, Pike, Price, Alexander H. Rice, John H.
Rice, Schenck, Scofield, Shannon, Sloan, Spalding, Starr, Stevens,
Thayer, Thomas, Tracy, Upson, Van Valkenburgh, Webster, Whaley,
Williams, Wilder, Wilson, Windom, Woodbridge—86.
Nays—Messrs. James C. Allen, William J. Allen, Ancona,
Augustus C. Baldwin, Bliss, Brooks, James S. Brown, Chanler,
Coffroth, Cox, Cravens, Dawson, Denison, Eden, Edgerton,
Eldridge, English, Finck, Ganson, Grider, Harding, Harrington,
Charles M. Harris, Herrick, Holman, Hutchins, Kalbfleisch, Kernan,
King, Knapp, Law, Lazear, Le Blond, Mallory, Marcy, McDowell,
McKinney, Wm. H. Miller, James R. Morris, Morrison, Odell,
Pendleton, Pruyn, Radford, Robinson, Jas. S. Rollins, Ross,
Smithers, John B. Steele, Wm. G. Steele, Stiles, Strouse, Stuart,
Sweat, Wadsworth, Ward, Wheeler, Chilton A. White, Joseph W.
White, Fernando Wood—60.
June 22—This bill was taken up in the Senate, when Mr.
Saulsbury moved this substitute:
That no person held to service or labor in one State, under the laws
thereof, escaping into another, shall, in consequence of any law or
regulation therein, be discharged from such service or labor, but
shall be delivered up on claim of the party to whom such service or
labor may be due; and Congress shall pass all necessary and proper
laws for the rendition of all such persons who shall so, as aforesaid,
escape.
Which was rejected—yeas 9, nays 29, as follows:
Yeas—Messrs. Buckalew, Carlile, Cowan, Davis, McDougall,
Powell, Richardson, Riddle, Saulsbury—9.
Nays—Messrs. Anthony, Brown, Chandler, Clark, Conness, Dixon,
Foot, Grimes, Hale, Harlan, Harris, Hicks, Howard, Howe, Johnson,
Lane of Indiana, Lane of Kansas, Morgan, Morrill, Pomeroy,
Ramsey, Sprague, Sumner, Ten Eyck, Trumbull, Van Winkle, Wade,
Willey—29.
Mr. Johnson, of Maryland, moved an amendment to substitute a
clause repealing the act of 1850; which was rejected—yeas 17, nays
22, as follows:
Yeas—Messrs. Buckalew, Carlile, Cowan, Davis, Harris, Hicks,
Johnson, Lane of Indiana, McDougall, Powell, Richardson, Riddle,
Saulsbury, Ten Eyck, Trumbull, Van Winkle, Willey—17.
Nays—Messrs. Anthony, Brown, Chandler, Clark, Conness, Dixon,
Fessenden, Foot, Grimes, Hale, Harlan, Howard, Howe, Lane of
Kansas, Morgan, Morrill, Pomeroy, Ramsey, Sprague, Sumner,
Wade, Wilson—22.
The bill then passed—yeas 27, nays 12, as follows:
Yeas—Messrs. Anthony, Brown, Chandler, Clark, Conness, Dixon,
Fessenden, Foot, Grimes, Hale, Harlan, Harris, Hicks, Howard,
Howe, Lane of Indiana, Lane of Kansas, Morgan, Morrill, Pomeroy,
Ramsey, Sprague, Sumner, Ten Eyck, Trumbull, Wade, Wilson—27.
Nays—Messrs. Buckalew, Carlile, Cowan, Davis, Johnson,
McDougall, Powell, Richardson, Riddle, Saulsbury, Van Winkle,
Willey—12.
Abraham Lincoln, President, approved it, June 28, 1864.
Seward as Secretary of State.
INTERNAL TAXES.
The system of internal revenue taxes imposed during the war did
not evenly divide parties until near its close, when Democrats were
generally arrayed against these taxes. They cannot, from the record,
be correctly classed as political issues, yet their adoption and the
feelings since engendered by them, makes a brief summary of the
record essential.
First Session, Thirty-Seventh Congress.
The bill to provide increased revenue from imports, &c., passed the
House August 2, 1861—yeas 89, nays 39.
Same day, it passed the Senate—yeas 34, nays 8, (Messrs.
Breckinridge, Bright, Johnson, of Missouri, Kennedy, Latham, Polk,
Powell, Saulsbury.)[24]
Second Session, Thirty-Seventh Congress.