case econ08 ab.az.ppt 02
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Case Econ08 Ab.az.Ppt 02TRANSCRIPT
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2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
Prepared by:
Fernando & YvonnQuijano
2
Chapter
The Economic Problem:Scarcity and Choice
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CHAPTER
2:TheEcono
micProblem:
ScarcityandChoice
2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 2 of !
Chapter Outline
2The Economic Problem:
Scarcity and Choice
Scarcity, Choice, and
Opportunity CostScarcity and Choice in aOne-Person EconomyScarcity and Choice in anEconomy of Two or MoreThe Production Possibility FrontierComparative Advantageand the Gains from TradeThe Economic Problem
Economic SystemsCommand EconomiesLaissez-Faire Economies:The Free MarketMixed Systems, Markets,and Governments
Looking Ahead
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2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair of !
THE ECONOMIC PROBLEM:SCARCITY AND CHOICE
FIGURE 2.1The Three Basic Questions
Three basic questions must be answered in
order to understand an economic system:
What gets produced?
How is it produced?
Who gets what is produced?
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THE ECONOMIC PROBLEM:SCARCITY AND CHOICE
capitalThings that are themselvesproduced and that are then used in theproduction of other goods and services.
factors of production (or factors)Theinputs into the process of production.Another word for resources.
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CHAPTER
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THE ECONOMIC PROBLEM:SCARCITY AND CHOICE
productionThe process thattransforms scarce resources into usefulgoods and services.
inputsorresourcesAnything providedby nature or previous generations thatcan be used directly or indirectly tosatisfy human wants.
outputsUsable products.
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SCARCITY, CHOICE, AND OPPORTUNITY COST
SCARCITY AND CHOICE IN AONE-PERSON ECONOMY
Nearly all the same basic decisions
that characterize complex economiesmust also be made in a simpleeconomy.
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2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 7 of !
The concepts ofconstrained choiceandscarcityare central to thediscipline of economics.
Opportunity Cost
SCARCITY, CHOICE, AND OPPORTUNITY COST
opportunity costsThe best alternativethat we give up, or forgo, when we makea choice or decision.
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SCARCITY, CHOICE, AND OPPORTUNITY COST
SCARCITY AND CHOICE IN ANECONOMY OF TWO OR MORE
Education takes time. Timespent in the classroom hasan opportunity cost.
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2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair $ of !
Specialization, Exchange, and ComparativeAdvantage
SCARCITY, CHOICE, AND OPPORTUNITY COST
theory of comparative advantageRicardos theory that specialization andfree trade will benefit all trading parties,even those that may be absolutely moreefficient producers.
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SCARCITY, CHOICE, AND OPPORTUNITY COST
absolute advantageA producer has anabsolute advantage over another in theproduction of a good or service if it can
produce that product using fewerresources.
comparative advantageA producerhas a comparative advantage over
another in the production of a good orservice if it can produce that product at alower opportunity cost.
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SCARCITY, CHOICE, AND OPPORTUNITY COST
FIGURE 2.2Comparative Advantage and the Gains from Trade
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SCARCITY, CHOICE, AND OPPORTUNITY COST
Weighing Present and Expected Future Costsand Benefits
We trade off present and future
benefits in small ways all the time.
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SCARCITY, CHOICE, AND OPPORTUNITY COST
Capital Goods and Consumer Goods
consumer goodsGoods produced forpresent consumption.
investmentThe process of usingresources to produce new capital.
Because resources are scarce, the opportunity cost of every investment in capital is
forgonepresent consumption.
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SCARCITY, CHOICE, AND OPPORTUNITY COST
production possibility frontier (ppf)Agraph that shows all the combinations of
goods and services that can beproduced if all of societys resources areused efficiently.
THE PRODUCTION POSSIBILITY FRONTIER
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SCARCITY, CHOICE, AND OPPORTUNITY COST
FIGURE 2.3Production Possibility Frontier
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SCARCITY, CHOICE, AND OPPORTUNITY COST
Unemployment
During economic downturns orrecessions, industrial plants run at less
than their total capacity. When there isunemployment of labor and capital, weare not producing all that we can.
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SCARCITY, CHOICE, AND OPPORTUNITY COST
Inefficiency
Waste and mismanagement are the results ofa firms operating below its potential.
Sometimes, inefficiency results frommismanagement of the economy instead ofmismanagement of individual private firms.
The Efficient Mix of Output
To be efficient, an economy must producewhat people want.
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SCARCITY, CHOICE, AND OPPORTUNITY COST
Negative Slope and Opportunity Cost
FIGURE 2.4Inefficiency from Misallocation
of Land in Farming
marginal rate oftransformation (MRT)The slope of the productionpossibility frontier (ppf).
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SCARCITY, CHOICE, AND OPPORTUNITY COST
TABLE 2.1 Production Possibility Schedule
for Total Corn and Wheat
Production in Ohio and Kansas
POINT
ON
PPF
TOTALCORN
PRODUCTION
(MILLIONS OF
BUSHELS PER
YEAR)
TOTALWHEAT
PRODUCTION
(MILLIONS OF
BUSHELS PER
YEAR)A 700 100
B 650 200
C 510 380
D 400 500
E 300 550
The Law of Increasing Opportunity Cost
FIGURE 2.5Corn and Wheat Production in
Ohio and Kansas
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SCARCITY, CHOICE, AND OPPORTUNITY COST
Economic Growth
economic growthAn increase in thetotal output of an economy. It occurs
when a society acquires new resourcesor when it learns to produce more usingexisting resources.
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SCARCITY, CHOICE, AND OPPORTUNITY COST
TABLE 2.2Increasing Productivity in Corn and Wheat Production in the United States,
19352006
CORN WHEAT
Yield Per Acre
(Bushels)
Labor Hours Per
100 Bushels
Yield Per Acre
(Bushels)
Labor Hours
Per 100 Bushels
19351939
19451949
19551959
19651969
19751979
1981198519851990
19901995
1998
2001
2006
26.1
36.1
48.7
78.5
96.3
107.2112.8
120.6
134.4
138.2
145.6
108
53
20
7
4
3NAa
NAa
NAa
NAa
NAa
13.2
16.9
22.3
27.5
31.3
36.938.0
38.1
43.2
43.5
42.3
67
34
17
11
9
7NAa
NAa
NAa
NAa
NAa
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SCARCITY, CHOICE, AND OPPORTUNITY COST
FIGURE 2.6Economic Growth Shifts the ppf Up and to the Right
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SCARCITY, CHOICE, AND OPPORTUNITY COST
FIGURE 2.7Capital Goods and Growth in Poor and Rich Countries
Sources of Growth and the Dilemma of thePoor Countries
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SCARCITY, CHOICE, AND OPPORTUNITY COST
COMPARATIVE ADVANTAGE AND THEGAINS FROM TRADE
FIGURE 2.8Production Possibility Frontiers with No Trade
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SCARCITY, CHOICE, AND OPPORTUNITY COST
FIGURE 2.9Colleen and Bill Gain from Trade
Although it exists only as an abstraction, the ppf illustrates a number of very important
concepts that we shall use throughout the rest of this book: scarcity, unemployment,
inefficiency, opportunity cost, the law of increasing opportunity cost, economic
growth, and the gains from trade.
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SCARCITY, CHOICE, AND OPPORTUNITY COST
THE ECONOMIC PROBLEM
Recall the three basic questions facingall economic systems:
(1) What gets produced?(2) How is it produced?(3) Who gets it?
Given scarce resources, how exactlydo large, complex societies go aboutanswering the three basic economicquestions?
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ECONOMIC SYSTEMS
COMMAND ECONOMIES
command economyAn economy inwhich a central government either
directly or indirectly sets output targets,incomes, and prices.
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ECONOMIC SYSTEMS
LAISSEZ-FAIRE ECONOMIES: THE FREEMARKET
laissez-faire economyLiterally fromthe French: allow [them] to do. An
economy in which individual people andfirms pursue their own self-interestswithout any central direction orregulation.
marketThe institution through whichbuyers and sellers interact and engagein exchange.
Some markets are simple and others are complex, but they all involve buyers and sellers
engaging in exchange. The behavior of buyers and sellers in a laisse!faire economy
determines what gets produced, how it is produced, and who gets it.
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ECONOMIC SYSTEMS
consumer sovereigntyThe idea thatconsumers ultimately dictate what will be
produced (or not produced) by choosingwhat to purchase (and what not topurchase).
Consumer Sovereignty
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ECONOMIC SYSTEMS
free enterpriseThe freedom of
individuals to start and operate privatebusinesses in search of profits.
Individual Production Decisions: FreeEnterprise
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ECONOMIC SYSTEMS
Distribution of Output
The amount that any one householdgets depends on its income and wealth.
Incomeis the amount that a householdearns each year. It comes in a number offorms: wages, salaries, interest, and thelike.
Wealthis the amount that householdshave accumulated out of past incomethrough saving or inheritance.
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ECONOMIC SYSTEMS
Price Theory
"n a free market system, the basic economic #uestions are answered without the help of
a central government plan or directives. This is what the $free% in free market means&
the system is left to operate on its own, with no outside interference. "ndividuals pursuing
their own self!interest will go into business and produce the products and services
that people want. 'thers will decide whether to ac#uire skills( whether to work(
and whether to buy, sell, invest, or save the income that they earn. The basic coordinating
mechanism is price.
New businesses arise eachday and some go out ofbusiness in response toprofit opportunities andlosses.
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ECONOMIC SYSTEMS
MIXED SYSTEMS, MARKETS, ANDGOVERNMENTS
)ven staunch defenders of the free enterprise system recognie that market systems are
not
perfect. *irst, they do not always produce what people want at lowest cost&there are
inefficiencies. Second, rewards +income may be unfairly distributed, and some groups maybe left out. Third, periods of unemployment and inflation recur with some regularity.
The differences between commandeconomies and laissez-faire economies intheir pure forms are enormous. In fact,these pure forms do not exist in the world;all real systems are in some sensemixed.
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CHAPTER
2:TheEcono
micProblem:
Scarcity
andChoice absolute advantage
capital
command economy
comparative advantage
consumer goods
consumer sovereignty
economic growth
factors of production (or
factors)free enterprise
inputs or resources
investments
laissez-faire economy
marginal rate of transformation
(MRT)
market
opportunity cost
outputs
production
production possibility frontier (ppf)theory of comparative advantage
REVIEW TERMS AND CONCEPTS