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Chapter 2
Resource Utilization
2-1Copyright 2008 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, fullemployment, full production, andunderemployment
Productive efficiency
What enables the economy to grow
The law of increasing cost
The concept of opportunity cost
2-2Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
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EconomicsDefined Economics is the efficient
allocation of thescarce
means ofproduction toward the
satisfaction of human wants
The means of production are limitedHuman wants are unlimited
2-3Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
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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 problemThere are never enough resources to
produce all of the goods and services thatpeople want
2-4Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
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Four Economic
Resources
Land
Labor
Capital Entrepreneurial ability
2-5Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
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Land Land (a broader meaning than our
normal understanding of the word)
Includes natural resources such as timber,
oil, coal, iron ore, soil, water, 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, officebuildings, shopping centers, homes, etc.
Owners of land receive rent
2-6Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
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Labor Labor
The work and time for which one is
paid is what economists call labor
Money received for ones labor is
called wages and/or salaries
About two-thirds of the total resource
cost is the cost of labor
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Capital Capital
Man-made goods used to produce other goods or
services is what economists call capital Examples are office buildings, stores, and factories
Consists of mainly plant and equipment
The money owners of capital receive is called
interest
Capital is the MOST important of the four economic
resources
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EntrepreneurialAbility
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
25 million businesses are virtually all
entrepreneurs The vast majority work for themselves or have one or two
employees
2-9Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
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Our Economic Problem
Revisited Limited resources versus unlimited
wants
There are NOT enough resources to
produce everything that everyone wants
Therefore, CHOICES must BE MADE!
Every choice has an opportunity cost
associated with it!
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Opportunity Cost: An Important,
Fundamental Concept in Economics
Because we cannot have everything wewant, we must make choices
The thing we give up (our second-bestchoice) is called the opportunity cost ofour choiceThis is the foregone value of the next best
alternative In the economic world, both is not an
admissible answer to a choice of whichone
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Highest Valued Alternative
Options
Watch TV
Talk on the telephone Go on a date
Study economics
Opportunity cost is the highest valued alternative that
could have been chosen (i.e., study economics) Opportunity cost may or may not have a dollar value
Choice made
Highest valued alternative
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Inherit $40,000
Bought the car
(Paid $40,000)
Cant go to college
College graduate (lifetime earnings) $1,300,000
High School graduate (lifetime earnings) 800,000
Two choices buy a car or go to college
Opportunity Cost $ 500,000
2-13Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
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California
1967-1997
Prisons
Added 21
additional prisons
Colleges
Added 1
additional college
The Opportunity Cost of building more
prisons is building fewer colleges
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The War in Iraq
Cost $5 billion a
month
Cost of troops
Schools
Hospitals
Could have been
spent on
Prescription drugs
for seniors
Schools and
hospitals in United
StatesThe Opportunity Cost of the war is less
money spent on needs in the United
States 2-15Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
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California
1990 - 1997 Prison guards
+ 10,000
College employees
- 10,000
Obviously, the opportunity cost of oneadditional prison guard is one college
employee
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Full EmploymentFive percent
unemployment rate1
From 1971 1996 the unemployment rate was above 5%. Inrecent years, this has sometime lingered below 5%.
1
2-17Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
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Full ProductionEighty five to ninety
percent utilizationrate
2-18Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
U d l t f
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Underemployment of
Resources
An unemployment rate greater than 5% A capacity utilization rate less than 85%
Discrimination
A phenomenon that has diminished but hasnot been eliminated entirely
Probably keeps our output 10 - 15 percent
below what it could be If there was truly an efficient allocation of
resources
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The Production Possibilities
Curve Represents our economy at
Full employmentFull production
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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
2-21
Units of guns
16
14
12
10
8
6
4
2
A
B
C
D
E
F
10 2 3 4 5 6
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
Hypothetical Production Schedule
Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Production Possibilities Curve
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2-22
Units of guns
16
14
12
10
8
6
4
2
A
B
C
D
E
F
10 2 3 4 5 6
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
Hypothetical Production Schedule
Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Production Possibilities Curve
To gain 1 unit of Guns
Had to give up 1 unit of butter
When you are on the curve, to get more of one thing you have to give up
some of the other thing
In this particular instance, the opportunity cost
of gaining one unit of guns was one unit ofbutter
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2-23
Units of guns
16
14
12
10
8
6
4
2
A
B
C
D
E
F
10 2 3 4 5 6
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
Hypothetical Production Schedule
Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Production Possibilities Curve
To gain 1 unit of Guns
Had to give up 2 units of butter
When you are on the curve, to get more of one thing you have to give up
some of the other thing
In this particular instance, the opportunity cost
of gaining one unit of guns was two units ofbutter
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2-24
Units of guns
16
14
12
10
8
6
4
2
A
B
C
D
E
F
10 2 3 4 5 6
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
Hypothetical Production Schedule
Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Production Possibilities Curve
To gain 1 unit of Guns
Had to give up 3 units of butter
When you are on the curve, to get more of one thing you have to give up
some of the other thing
In this particular instance, the opportunity cost
of gaining one unit of guns was three units ofbutter
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2-25
Units of guns
16
14
12
10
8
6
4
2
A
B
C
D
E
F
10 2 3 4 5 6
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
Hypothetical Production Schedule
Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Production Possibilities Curve
To gain 1 unit of Guns
Had to give up 4 units of butter
When you are on the curve, to get more of one thing you have to give up
some of the other thing
In this particular instance, the opportunity cost
of gaining one unit of guns was four units ofbutter
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2-26
Units of guns
16
14
12
10
8
6
4
2
A
B
C
D
E
F
10
2 3 4 5 6
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
Hypothetical Production Schedule
Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Production Possibilities Curve
To gain 1 unit of Guns
Had to give up 5 units of butter
When you are on the curve, to get more of one thing you have to give up
some of the other thing
In this particular instance, the opportunity cost
of gaining one unit of guns was five units ofbutter
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2-27
Units of guns
16
14
12
10
8
6
4
2
A
B
C
D
E
F
10
2 3 4 5 6
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
Hypothetical Production Schedule
Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Production Possibilities Curve
This is known as the law of increasing cost.
As the output of one good expands, the
opportunity cost of producing additional
units of this good increases.
As we shift from butter to guns, we have to give
up increasing units of butter for each additional
unit of guns
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Productive Efficiency
Is attained when the maximum possibleoutput of one good is produced, given the
output of other goodsProductive efficiency occurs only when we
are operating on the production possibilitiescurve
Productivity efficiency means that the outputof one good cannot be attained with outreducing the output of some other good
2-30Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
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Economic Growth Best available technology
Expansion of laborMore or better trained labor
Expansion of capital
More or improved plant andequipment
2-31Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
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Production Possibilities Curves
A move from PPC to PPC to PPC represents economic growth1 32
2-32
Units of guns
15
10
5
0
PPC 1
PPC 2
PPC 3
5 10 15
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Production Possibilities Curves Over TimeCountry A Country B
Country A represents slower
economic growth than Country BCountry A capital goods is 3.8 units
Country B represents much faster
economic growth than Country ACountry B capital goods is 7.0 units
2-33
Units of consumer goods
25
20
15
10
5
0
PPC2001
PPC1991
A.
Units of consumer goods
25
20
15
10
5
0
PPC2001
PPC1991
B
B.
5 10 15 5 10 15
A
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The Production Possibilities Frontier
during World War II
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Current Issue: Will you be
Underemployed When You Graduate? It depends on whether graduate in a bad year
or a good year
One in five college graduates who graduate in a badyear end up in a job that does not require a a college
degree
However, many employers require a degree just as a
credential to be considered for a particular job
All you can really do is to avoid, to be best of your
ability, taking a job where you are obviously
underemployed
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