Economizing Scarce Resources
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A. Factors of Production
Anything fixed (natural resources)
Physical and mental talents
Something physical to aid production (factories, computers, an
educated/trained labor force)
Initiative, risk taking, innovation
B. The Production Possibility
measures how many of two types of goods can
Static Model (time is
constant, inputs are fixed)
a. Consumer goods such as televisions, pizzas, and
bring current satisfaction.
b. Capital goods such
as machinery, tractors, and improved
increase future productive capabilities.
c. Point F on the production possibility
full employment of all
resources (100% efficiency).
d. Point U represents unemployment of some
e. Having more capital goods requires giving up some
Applies to individuals as you can invest by building a deck or going to
you can go on an expensive vacation.
g. How society and individuals answer these economic
questions is explored in chapters five and six.
2. Dynamic Model
(time is not constant, inputs like factors and technology are not
growth indicated by, arrows occur
a. As inputs increase, growth occurs and the curve
b. Point S represents slow growth due to high
c. Point R represents rapid growth due to high
d. Economic and political system chosen and run by a
society determines the location and
movement of these variables
a. The cost of Item A measured in terms of what must be foregone
of Item B.
b. When considering doing
A, we consider the highest valued alternative as limited resources
we can't afford both.
c. For more information
Production Possibilities Curve from Wikipedia.
Politicians seldom talk of the opportunity cost of what they plan to do.
1. The opportunity cost of good grades is the value which could have
by spending time with family and friends.
2. The opportunity costs of more capital goods is the value which could
received from having more consumer goods.
Law of increasing opportunity costs
a. Opportunity costs usually increase.
1. To have one unit of Item A you must give up amount X of Item B.
To have a second unit of Item A you must give up more than amount X of
2. Primary reason for increasing costs is resources are not perfect
a) Training more people in math and science would increase
productivity for a while
but eventually people
trained to be engineers who would be more productive
managers, teachers, or entertainers etc.
b) Gains from replacing people with machines may be large at
first but eventually
machines would be used to do
what people can do more efficiently.
c. When opportunity costs are not increasing, the production
possibility curve is a straight line.
High tech investment may even
bend the curve the other way with lower cost, but not forever!
d. Below is an example of the trade-off between investing in high
tech industries people versus
e. Alternative Production Possibilities for 10
entertainers and no technicians'.
Units of Production
0 1 2
10 9 7
Cost of an additional unit of high tech production 1 2 3
measured in terms of entertainment given up
Adam Sandler, a great entertainer, probably would not of been
a great computer programmer, though his
dad Stan was an electrical engineer,
his sister Elizabeth a dentist,
and his brother a Scott a lawyer. Adam might be
the first resource to move to create more production.