CHAPTER 1.  1. Land ◦ Anything that is a “gift of nature” i.e. whale  2. Labor ◦ The physical and mental talents that go into producing a good or service.

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Presentation transcript:

CHAPTER 1

 1. Land ◦ Anything that is a “gift of nature” i.e. whale  2. Labor ◦ The physical and mental talents that go into producing a good or service  3. Capital ◦ All of the manufactured items that aid in the production of a good  4. Entrepreneurial Ability ◦ Innovator that combines the other 3 FOP’s ◦ Risk bearer – has no guarantee for profit ◦ Makes all of the strategic business decisions

 Macroeconomic model of all of the alternatives and choices society faces in allocating resources (book page #11)

 Assumptions we will make  1. Full employment ◦ Economy is employing or using all available resources i.e. No leftovers  2. Fixed Resources ◦ Quantity and Quality of the Factors of Production are fixed  3. Fixed Technology ◦ The state of technology is constant  4. Two Goods ◦ Only making Pizzas (consumer good) and Industrial Robots (capital good)

 Lists the different combinations of products that can be produced with a specific set of resources assuming full employment (book page #11) ◦ You can choose to make either product ◦ But there will ALWAYS be a cost ◦ You will always be sacrificing either short-term goals or long-term goals (hence a trade-off)

 Let’s think about it: ◦ If you would quit school today you could get a job and be making money for the rest of the school year and make more money than the students who stayed in school. ◦ BUT ◦ If you stay in school and forgo the short-term money, you will make much more money in the future

 Some Details ◦ Otherwise more fondly known as the PPC ◦ It depicts what can be produced using fully- employed resources (book page #12) ◦ Each point on the curve represents the maximum output of the two products

 More fun facts ◦ The curve is a constraint because it shows the limit of attainable outputs (Similar to a budget line) ◦ Points on the curve are:  Attainable as long as the economy uses all of its resources i.e. full employment ◦ Points inside the curve are:  Attainable, but are less than ideal and do not reflect full-employment i.e. under employment ◦ Points beyond the curve are:  Unattainable, because there are not enough resources

 The Pregnancy Analogy: When the baby is inside. It is attainable, but under-developed When the baby is born. It is attainable, and fully grown using all of the resources A baby could not be bigger than the mother’s body. Therefore it is unattainable and impossible unless the mother was bigger, but if it was possible it would be a really big baby.

 Think of this: ◦ You are producing apples and want to produce more  Think about the factors of Production  What do you need to produce the apples?

 Let’s take it a bit further: ◦ Is it possible to produce apples in the desert?

 So: ◦ The LOIC states that when considering the production of a particular good  The opportunity cost for each additional item being made increases  Why? ◦ Resources are not always adaptable to a making a good

 Where MB=Marginal Benefit, equals Marginal Cost (book page # 13 & 14)  Remember society should only produce when the benefits exceed or equal the cost (its Common Sense)

 There are always periods and dips where the economy of a country is not at full employment  If we take away the assumption of full employment ◦ We can be at any point within the PPC ◦ To regain full employment we must move from that point to a point on the PPC

 By dropping the assumptions that the QTY and Quality of resources and technology are fixed ◦ We can have the PPC shift and the potential maximum output of the economy will change ◦ Advances in or new technology, resources, or use of resources will shift the curve outward ◦ Economic Growth occurs (A larger total output)

 Is the result of: 1.Increases in supplies or resources 2.Improvements in resource quality 3.Technological advances  Can allow for: ◦ Increases in both consumer and capital goods instead of one or the other

 On the PPC ◦ One axes of the graph is “goods for the present” ◦ The other is “goods for the future”  You trade-off “present” for “future”  Neither is wrong ◦ It depends on the economy and what they want ◦ Their UTILITY

 The PPC only concerns your economy  But if you trade with another economy you might be able to do more ◦ Because of Specialization

 Think about this: ◦ Country A  Specializes in producing computers ◦ Country B  Specializes in producing apples  They can trade with one another and limit their marginal cost and increase their marginal benefit