economic problem - scarcity and choice (handwritten notes of scarcity and choice).ppt

8/14/2019 economic problem - scarcity and choice (handwritten notes of scarcity and choice).ppt

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The Economic Problem:Scarcity and Choice


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The Main Content

I. The economic problemII. Scarcity and choice

(the production possibility frontier)


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What is Production?Produc t ion is the process by whichresources are transformed into usefulforms.Resources , or i npu t s , refer to anythingprovided by nature or previousgenerations that can be used directly orindirectly to satisfy human wants.

Capi ta l resou rces

Hum an resourc es

Natura l resou rces


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Three Basic Questions


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Factors of Production

The basic resources that are available to asociety are f ac to r s o f p ro d u c t io n :1. Land (natu ral resou rce)2 . Labo r3. Capit al

Capital refers to the things that are

themselves produced and then used toproduce other goods and services.Produc t ion is the process that transformsscarce resources into useful goods andservices.


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I. Scarcity and Choice

Capi ta l goo ds are goods used to produce othergoods and services.

C o n su m er g o o d s are goods produced for

present consumption.Investment is the process of using resources toproduce new capital. Capital is the accumulationof previous investment.

The opp or tun i ty cos t o f every inves tm ent incap i tal i s fo rg one presen t co nsu m pt ion .


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The Production Possibility Frontier

The produc t ionpo ss ib i l i ty f ron t i er(ppf) is a graph thatshows all of thecombinations ofgoods and services

that can be producedif all of societysresources are usedefficiently.

A

B

C


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Inefficiency

Points inside of thecurve are inefficient.

At point H , resourcesare either unemployed,or are used inefficiently.


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Unattainable Point

Point F is desirablebecause it yields

more of bothgoods, but it is notattainable given the

amount ofresources availablein the economy.


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Efficiency

Point C is one ofthe possible

combinations ofgoods producedwhen resources arefully and efficientlyemployed.


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Negative Slope and OpportunityCost

A move along the curveillustrates the concept ofopportunity cost. The productionpossibility frontier curve has anegative slope, which indicatesa trade-off between producingone good or another.From point D, an increase theproduction of capital goodsrequires a decrease in the

amount of consumer goods.


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The Law of Increasing OpportunityCost

Cloth Wheat

0 15

1 14

2 12

3 9

4 5

5 0


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The slope of the ppf curve is also called them argin al rate of t rans form ation (MRT). The negative slope of the ppf curve reflects

the law of increasing opportunity cost. As weincrease the production of one good, wesacrifice progressively more of the other.Why is it so ?

Because economic resources are not completelysuited or adaptable for alternative uses.(a givenresource is more suited to the production of onegood than the other.


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economy foregoes increasing amounts of one goodwhen producing more of the other.Essentially, this law states that, as additional unitsof a good are manufactured, the opportunity costassociated with that production will also increase.Understanding this phenomenon can helpbusinesses determine if choosing to increase

production is worth the effort, or if the increasingopportunity costs mean that the benefits of doing soare reduced sufficiently to merit maintainingproduction at a lower level.


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Economic Growth

Eco n o m ic g ro w th is an increasein the total output of the economy.It occurs when a society acquiresnew resources, or when it learnsto produce more using existingresources.

The main sources of economicgrowth are capital accumulationand technological advances,

human resources


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Economic Growth

An outward shift means that it is

possible to increase the productionof one good without decreasing theproduction of the other.Scientists ,engineers discover newand innovative ways of producing

thingsTechnological progress byimproving productive efficiencyallows society to produce goods atgiven and fixed amount of

resources

Outward shifts of the curverepresent econo mic g ro wth .


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Capital Goods and Growthin Poor and Rich Countries

Rich countries devotemore resources tocapital production thanpoor countries.

As more resources flowinto capital production,

the rate of economicgrowth in rich countriesincreases, and so doesthe gap between rich

and poor countries

economic problem - scarcity and choice (handwritten notes of scarcity and choice).ppt

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