Chap002-Resource Utilization

8/14/2019 Chap002-Resource Utilization

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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



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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



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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



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Four Economic

Resources

Land

Labor

Capital Entrepreneurial ability



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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



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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



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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



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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



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Full ProductionEighty five to ninety

percent utilizationrate


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


A 15 0

B 14 1

C 12 2

D 9 3

E 5 4

F 0 5




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


A 15 0

B 14 1

C 12 2

D 9 3

E 5 4

F 0 5





Had to give up 2 units of butter




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


A 15 0

B 14 1

C 12 2

D 9 3

E 5 4

F 0 5









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


A 15 0

B 14 1

C 12 2

D 9 3

E 5 4

F 0 5









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


A 15 0

B 14 1

C 12 2

D 9 3

E 5 4

F 0 5









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


A 15 0

B 14 1

C 12 2

D 9 3

E 5 4

F 0 5




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



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Economic Growth Best available technology

Expansion of laborMore or better trained labor

Expansion of capital

More or improved plant andequipment



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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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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

Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved. 2-35


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Chap002-Resource Utilization