1 Principles of Economics 2nd edition Principles of Economics 2nd edition by Fred M Gottheil © ©1999 South-Western College Publishing PowerPoint Slides prepared by Ken Long

2 Chapter 2 Production Possibilities and Opportunity Costs 6/28/2016 © ©1999 South-Western College Publishing

3 This chapter discusses principles associated with Division of Labor and Specialization Technological Change and Economic Growth The Law of Increasing Costs Opportunity Costs Production Possibilities Factors of Production Absolute and Comparative Advantage © ©1999 South-Western College Publishing

4 What are the Factors of Production? Labor Capital Land Entrepreneurship © ©1999 South-Western College Publishing

5 What is Labor? The physical and intellectual effort of people engaged in producing goods and services © ©1999 South-Western College Publishing

6 What is Capital? Manufactured goods used to make and market other goods and services © ©1999 South-Western College Publishing

7 What is Human Capital? The knowledge and skills acquired by labor, principally through education and training © ©1999 South-Western College Publishing

8 What is Land? A natural-state resource such as real estate, grasses and forests, and metals and minerals © ©1999 South-Western College Publishing

9 Who is an Entrepreneur? A person who alone assumes the risks and uncertainties of a business © ©1999 South-Western College Publishing

10 What is Production Possibilities? The combinations of goods that can be produced when resources and technology are used efficiently © ©1999 South-Western College Publishing

11 Production Possibilities Curve Capital Goods Unattainable Inefficient Consumer Goods 1111 © ©1999 South-Western College Publishing

12 What is true along the Production Possibilities Curve? available resources are used fully division of labor is maximized shows most efficient combination of resources © ©1999 South-Western College Publishing

13 Why does division of labor increase productivity? Because the more labor is specialized the more nonproductive activity is eliminated © ©1999 South-Western College Publishing

14 What is an Opportunity Cost? The quantity of other goods that must be given up to obtain a good © ©1999 South-Western College Publishing

15 What arguments do the following make for decreasing the military? © ©1999 South-Western College Publishing

16 What choices are made along the Production Possibilities curve? To have more of one product units of the other have to be given up © ©1999 South-Western College Publishing

17 How do we have more of everything? By increasing our resources © ©1999 South-Western College Publishing

18 Increased Resources Increased Resources Capital Goods Consumer Goods 1818 © ©1999 South-Western College Publishing

19 What are some examples of increased resources? Innovations - an idea that takes the form of new applied technology Technology - an improvement in capital © ©1999 South-Western College Publishing

20 Innovations Innovations Capital Goods Consumer Goods 2020 © ©1999 South-Western College Publishing

21 Technological Change Capital Goods Consumer Goods 2121 © ©1999 South-Western College Publishing

22 What is the Law of Increasing Costs? The opportunity cost of producing a good increases as more of the good is produced © ©1999 South-Western College Publishing

23 What should a country specialize in producing? In those goods and services that it has a comparative advantage © ©1999 South-Western College Publishing

24 What is Comparative Advantage? A country’s ability to produce a good at a lower opportunity cost than the country which it trades © ©1999 South-Western College Publishing

25 What is Absolute Advantage? A country’s ability to produce a good using fewer resources than the country with which it trades © ©1999 South-Western College Publishing

26 Should a country produce that with which it has an Absolute Advantage? No! Not unless it also has a comparative advantage in those goods and services © ©1999 South-Western College Publishing

27 Why?Why? Because by so doing its opportunity costs may be too high © ©1999 South-Western College Publishing

28 Can you give an example? If workers were to produce wicker baskets ( absolute advantage ) that time could not be spent on computers ( comparative advantage ) © ©1999 South-Western College Publishing

29 What are Factors of Production? What is Production Possibilities? Why does division of labor increase productivity?Why does division of labor increase productivity? What is an Opportunity Cost? What is Comparative Advantage? What is Absolute Advantage?

30 ENDEND © ©1999 South-Western College Publishing