Chapter 2 Resource Utilization 2-1 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved

Chapter 2

Resource Utilization

2-1Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Objectives

• Definition of economics

• Central fact of economics

• The four economic resources

• Opportunity cost

• Full employment

• Full production

• Productive and allocative efficiency

• Enabling the economy to grow

• The law of increasing cost2-2Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

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


The Central Fact of Economics Is 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


Four Economic Resources

• Land

• Labor

• Capital

• Entrepreneurial ability


Land– 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, office buildings, shopping centers, homes, etc.

– Produces “rent”


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


Capital– Man-made goods used to produce

other goods or services is what economists call “capital”• Examples are office buildings, stores,

and factories– The money owners of “capital” receive

is called “interest”– Capital is the MOST important of the

four economic resources


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


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!


Opportunity Cost: An Important, Fundamental Concept in Economics

• Because we cannot have everything we want, 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, “both” is not an admissible answer to a choice of “which one”


Highest Valued Alternative

• Options– Watch TV– Talk on the telephone– Go on a date– Study economics

• The opportunity cost here is the highest valued alternative that could have been chosen (i.e., study economics)

Choice made

Highest valued alternative


Inherit $40,000

• Bought the car– (Paid $40,000)

• Can’t 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


Production Possibilities Frontier

• Represents our economy at

– Full employment

– Full production


The Production Possibilities Frontier (PPF) measures the quantity of two goods that an economy or business is capable of producing with its current available resources and technology

2-20

Units of guns

16

14

12

10

8

6

4

2

AB

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 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Production Possibilities Curve

2-21

Units of guns

16

14

12

10

8

6

4

2

AB

C

D

E

F

10

2 3 4 5 6





To gain 1 unit of Guns

Had to give up 1 unit of butter

When you are on the line (PPF), 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 of butter

2-22

Units of guns

16

14

12

10

8

6

4

2

AB

C

D

E

F

10

2 3 4 5 6






Had to give up 2 units of butter


In this particular instance, the opportunity cost of gaining one unit of guns was two units of butter

2-23

Units of guns

16

14

12

10

8

6

4

2

AB

C

D

E

F

10

2 3 4 5 6








In this particular instance, the opportunity cost of gaining one unit of guns was three units of butter

2-24

Units of guns

16

14

12

10

8

6

4

2

AB

C

D

E

F

10

2 3 4 5 6








In this particular instance, the opportunity cost of gaining one unit of guns was four units of butter

2-25

Units of guns

16

14

12

10

8

6

4

2

AB

C

D

E

F

10

2 3 4 5 6








In this particular instance, the opportunity cost of gaining one unit of guns was five units of butter

When you are on the line (PPF), to get more of one thing you have to give up some of the other thing.

When you are at a point that is inside the line (PPF) it is possible to get more of both.

If you were at point G, it would be possible to move to point D or any other point on the line (PPF) and get more butter and more guns.


Units of guns

16

14

12

10

8

6

4

2

AB

C

D

E

F

10

2 3 4 5 6

G

Points Inside and Outside the Production Possibilities Curve Frontier

Every point on the curve represents output at Full Employment

Every point inside the curve represents output at less than Full employment

2-27

Units of guns

16

14

12

10

8

6

4

2

AB

C

D

E

F

W

X

Y

1 2 3 4 5 60

Z


Where we usually are

A Recession

A Depression

Point W represents output at more than full employment and is currently unattainable

Documents

Chapter 2 Resource Utilization 2-1 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved