Chapter 2 Resource Utilization

The Central Fact of Economics: 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 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, office buildings, shopping centers, homes, etc. Produces “rent”

Labor 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 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”

Inherit $40,000 Bought the car Can’t go to college Two choices – buy a car or go to college 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 Opportunity Cost $ 500,000

Underemployment of Resources An unemployment rate greater than 5% A capacity utilization rate less than 85%

The Production Possibilities Curve Represents our economy at Full employment Full production

Hypothetical Production Schedule As we shift from butter to guns, we have to give up increasing units of butter for each additional unit of guns Production Possibilities Curve Hypothetical Production Schedule 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 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.

Points Inside and Outside the Production Possibilities Curve Frontier Point W represents output at more than full employment and full production and is currently unattainable Where we usually are A Recession A Depression Every point on the curve represents output at Full Employment and Full Production Every point inside the curve represents output at less than Full employment and less than Full Production

Productive Efficiency Is attained when the maximum possible output of one good is produced, given the output of other goods Productive efficiency occurs only when we are operating on the production possibilities curve Productivity efficiency means that the output of one good cannot be attained without reducing the output of some other good

Economic Growth Best available technology Expansion of labor More or better trained labor Expansion of capital More or improved plant and equipment

Production Possibilities Curves A move from PPC to PPC to PPC represents economic growth 1 2 3

Production Possibilities Curves Over Time Country B Country A Country A represents slower economic growth than Country B Country B represents much faster economic growth than Country A Country A capital goods is 3.8 units Country B capital goods is 7.0 units