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Chapter 2

Resource Utilization

Copyright  2005 by The McGraw-Hill Companies, Inc. All rights reserved.

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Objectives



The definition of economics
The central fact of economics
The four economic resources
The concepts of opportunity cost, full
employment, full production, and
productive efficiency
• What enables the economy to grow
• The law of increasing cost
Copyright  2005 by The McGraw-Hill Companies, Inc. All rights reserved.

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Economics Defined
• Economics is the efficient
allocation of the scarce means of
production toward the
satisfaction of human wants
– The means of production are limited
– Human wants are unlimited

Copyright  2005 by The McGraw-Hill Companies, Inc. All rights reserved.

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All rights reserved.The Central Fact of Economics: SCARCITY • Scarcity – Resources are the things society uses to produce goods and services • These resources are scarce (limited) • The economic problem – There are never enough resources to produce all of the goods and services that people want Copyright  2005 by The McGraw-Hill Companies. 2-4 . Inc.

Inc.Four Economic Resources • Land • Labor • Capital • Entrepreneurial ability Copyright  2005 by The McGraw-Hill Companies. All rights reserved. 2-5 .

soil. homes. etc. office buildings. as well as the ground in which these resources are found – Is used for the extraction of minerals and farming – Provides the site for factories. iron ore. shopping centers. Inc. water. – Produces “rent” Copyright  2005 by The McGraw-Hill Companies. 2-6 .Land • Land (a broader meaning than our normal understanding of the word) – Includes natural resources such as timber. All rights reserved. oil. coal.

Labor • Labor – The work and time for which one is paid is what economists call “labor” – Money received for one’s labor is called wages and/or salaries – About two-thirds of the total resource cost is the cost of labor Copyright  2005 by The McGraw-Hill Companies. Inc. 2-7 . All rights reserved.

and factories – The money owners of “capital” receive is called “interest” – Capital is the MOST important of the four economic resources Copyright  2005 by The McGraw-Hill Companies.Capital • Capital – Man-made goods used to produce other goods or services is what economists call “capital” • Examples are office buildings. stores. All rights reserved. 2-8 . Inc.

2-9 . All rights reserved.Entrepreneurial Ability • The entrepreneur – – – – Sets up a business Assembles the needed resources Risks his/her own (or borrowed) money Makes a “profit” or incurs a “loss” • Is central to the American economy – 23 million businesses are virtually all entrepreneurs • The vast majority work for themselves or have one or two employees Copyright  2005 by The McGraw-Hill Companies. Inc.

All rights reserved. 2-10 . Inc. CHOICES must BE MADE! • Every choice has an “opportunity cost” associated with it! Copyright  2005 by The McGraw-Hill Companies.Our Economic Problem Revisited • Limited resources versus unlimited wants • There are NOT enough resources to produce everything that everyone wants • Therefore.

we must make choices • The thing we give up (our second-best choice) is called the opportunity cost of our choice – This is the foregone value of the next best alternative • In the economic world. Fundamental Concept in Economics • Because we cannot have everything we want.Opportunity Cost: An Important. “both” is not an admissible answer to a choice of “which one” Copyright  2005 by The McGraw-Hill Companies. 2-11 . All rights reserved. Inc.

study economics) Copyright  2005 by The McGraw-Hill Companies. All rights reserved.e. 2-12 .Highest Valued Alternative • Options – – – – Watch TV Talk on the telephone Go on a date Study economics Choice made Highest valued alternative • Opportunity cost is the highest valued alternative that could have been chosen (i.. Inc.

000 2-13 . $1.300.Inherit $40.000 Two choices – buy a car or go to college • Bought the car • Can’t go to college – (Paid $40. Inc.000 $ 500.000) College graduate (lifetime earnings) High School graduate (lifetime earnings) Opportunity Cost Copyright  2005 by The McGraw-Hill Companies.000 800. All rights reserved.

California 1967-1997 • Prisons – Added 21 additional prisons • Colleges – Added 1 additional college The Opportunity Cost of building more prisons is building fewer colleges Copyright  2005 by The McGraw-Hill Companies. 2-14 . All rights reserved. Inc.

000 • College employees – .1997 • Prison guards – + 10.California 1990 . the opportunity cost of one additional prison guard is one college employee Copyright  2005 by The McGraw-Hill Companies.000 Obviously. All rights reserved. Inc. 2-15 .10.

this has hovered above 4 %. In recent years. the next edition of the textbook may adjust this to 4 % Copyright  2005 by The McGraw-Hill Companies. All rights reserved. Inc. 2-16 .Full Employment • Five percent unemployment rate 1 1From 1971 – 1996 the unemployment rate was above 5%. If it stays this low.

2-17 . All rights reserved.Full Production • Eighty five to ninety percent utilization rate Copyright  2005 by The McGraw-Hill Companies. Inc.

2-18 . All rights reserved.15 percent below what it could be • If there was truly an efficient allocation of resources Copyright  2005 by The McGraw-Hill Companies.Underemployment of Resources • An unemployment rate greater than 5% • A capacity utilization rate less than 85% • Discrimination – A phenomenon that has diminished but has not been eliminated entirely – Probably keeps our output 10 . Inc.

The Production Possibilities Curve • Represents our economy at – Full employment – Full production Copyright  2005 by The McGraw-Hill Companies. Inc. 2-19 . All rights reserved.

Production Possibilities Curve 16 14 Hypothetical Production Schedule Point Units of Butter Units of Guns A 15 0 B 14 1 C 12 2 D 9 3 E 5 4 F 0 5 A B C 12 10 D 8 6 E 4 2 0 F 1 2 3 4 5 6 Units of guns This Production Possibilities Curve shows the range of possible combinations of guns and butter extending from 15 units of butter and no guns at point A to 5 units of guns and no butter at point F Copyright  2005 by The McGraw-Hill Companies. 2-20 . Inc. All rights reserved.

the opportunity cost of gaining one unit of guns was one unit of butter A B C 12 10 D 8 6 E 4 2 0 F 1 2 3 4 5 6 Units of guns To gain 1 unit of Guns When you are on the curve. to get more of one thing you have to give up some of the other thing Copyright  2005 by The McGraw-Hill Companies.Had to give up 1 unit of butter Production Possibilities Curve 16 14 Hypothetical Production Schedule Point Units of Butter Units of Guns A 15 0 B 14 1 C 12 2 D 9 3 E 5 4 F 0 5 In this particular instance. 2-21 . All rights reserved. Inc.

2-22 . the opportunity cost of gaining one unit of guns was two units of butter A B C 12 10 D 8 6 E 4 2 0 F 1 2 3 4 5 6 Units of guns To gain 1 unit of Guns When you are on the curve. Inc. All rights reserved.Had to give up 2 units of butter Production Possibilities Curve 16 14 Hypothetical Production Schedule Point Units of Butter Units of Guns A 15 0 B 14 1 C 12 2 D 9 3 E 5 4 F 0 5 In this particular instance. to get more of one thing you have to give up some of the other thing Copyright  2005 by The McGraw-Hill Companies.

2-23 . to get more of one thing you have to give up some of the other thing Copyright  2005 by The McGraw-Hill Companies.Had to give up 3 units of butter Production Possibilities Curve 16 14 Hypothetical Production Schedule Point Units of Butter Units of Guns A 15 0 B 14 1 C 12 2 D 9 3 E 5 4 F 0 5 In this particular instance. Inc. the opportunity cost of gaining one unit of guns was three units of butter A B C 12 10 D 8 6 E 4 2 0 F 1 2 3 4 5 6 Units of guns To gain 1 unit of Guns When you are on the curve. All rights reserved.

Had to give up 4 units of butter Production Possibilities Curve 16 14 Hypothetical Production Schedule Point Units of Butter Units of Guns A 15 0 B 14 1 C 12 2 D 9 3 E 5 4 F 0 5 In this particular instance. All rights reserved. Inc. 2-24 . the opportunity cost of gaining one unit of guns was four units of butter A B C 12 10 D 8 6 E 4 2 0 F 1 2 3 4 5 6 Units of guns To gain 1 unit of Guns When you are on the curve. to get more of one thing you have to give up some of the other thing Copyright  2005 by The McGraw-Hill Companies.

Inc. All rights reserved.Had to give up 5 units of butter Production Possibilities Curve 16 14 Hypothetical Production Schedule Point Units of Butter Units of Guns A 15 0 B 14 1 C 12 2 D 9 3 E 5 4 F 0 5 In this particular instance. to get more of one thing you have to give up some of the other thing Copyright  2005 by The McGraw-Hill Companies. the opportunity cost of gaining one unit of guns was five units of butter A B C 12 10 D 8 6 E 4 2 0 F 1 2 3 4 5 6 Units of guns To gain 1 unit of Guns When you are on the curve. 2-25 .

Inc. F 1 2 3 4 5 6 Units of guns 2-26 . 0 Copyright  2005 by The McGraw-Hill Companies. the opportunity cost of producing additional units of this good increases.” As the output of one good expands. All rights reserved.As we shift from butter to guns. we have to give Production Possibilities Curve up increasing units of butter for each additional 16 unit of guns A 14 Hypothetical Production Schedule Point Units of Butter Units of Guns A 15 0 B 14 1 C 12 2 D 9 3 E 5 4 F 0 5 B C 12 10 D 8 6 E 4 2 This is known as the “law of increasing cost.

2-27 . Inc. to get more of one thing you have to give up some of the other thing If you were at point G.When you are on the curve. All rights reserved. it would be possible to move to point D or any other point on the line (PPF) and get more butter and more guns When you are at a point that is inside the line (PPF) it is possible to get more of both 16 14 A B C 12 10 D 8 6 G E 4 2 0 F 1 2 3 4 5 6 Units of guns Copyright  2005 by The McGraw-Hill Companies.

2-28 . Inc. All rights reserved.Points Inside and Outside the Production Possibilities Curve Frontier Point W represents output at more than full employment and full production and is currently unattainable 16 14 A B W C 12 10 Where we usually are A Recession A Depression D X 8 Y 6 E Z 4 2 0 F 1 2 3 4 Units of guns 5 6 Every point on the curve represents output at Full Employment and Full Production Every point inside the curve represents output at less than Full employment and less than Full Production Copyright  2005 by The McGraw-Hill Companies.

given the output of other goods – Productive efficiency occurs only when we are operating on the production possibilities curve – Productivity efficiency means that the output of one good cannot be attained with out reducing the output of some other good Copyright  2005 by The McGraw-Hill Companies.Productive Efficiency • Is attained when the maximum possible output of one good is produced. 2-29 . All rights reserved. Inc.

Economic Growth • Best available technology • Expansion of labor – More or better trained labor • Expansion of capital – More or improved plant and equipment Copyright  2005 by The McGraw-Hill Companies. 2-30 . All rights reserved. Inc.

2-31 . Inc.Production Possibilities Curves 15 PPC 3 PPC 2 10 PPC 1 5 0 5 10 Units of guns 15 A move from PPC1 to PPC2 to PPC3 represents economic growth Copyright  2005 by The McGraw-Hill Companies. All rights reserved.

B. Inc. All rights reserved. 25 25 20 20 15 15 10 PPC 2001 PPC 2001 10 B 5 0 PPC 1991 PPC 1991 A 5 10 15 Units of consumer goods Country A represents slower economic growth than Country B Country A capital goods is 3.0 units Copyright  2005 by The McGraw-Hill Companies. 2-32 .8 units 5 0 5 10 15 Units of consumer goods Country B represents much faster economic growth than Country A Country B capital goods is 7.Production Possibilities Curves Over Time Country B Country A A.

2-33 . All rights reserved.The Production Possibilities Frontier during World War II Copyright  2005 by The McGraw-Hill Companies. Inc.