Ppt econ 9e_one_click_ch02

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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster
PowerPoint Lectures for
Principles of Economics,
9e
By
Karl E. Case,
Ray C. Fair &
Sharon M. Oster
; ;

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2
PART I INTRODUCTION TO ECONOMICS
The Economic
Problem: Scarcity
and Choice
Fernando & Yvonn Quijano
Prepared by:

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2
PART I INTRODUCTION TO ECONOMICS
The Economic
Problem: Scarcity
and Choice
Scarcity, Choice, and
Opportunity Cost
Scarcity and Choice in a One-
Person Economy
Scarcity and Choice in an Economy
of Two or More
The Production Possibility Frontier
The Economic Problem
Economic Systems
Command Economies
Laissez-Faire Economies:
The Free Market
Mixed Systems, Markets, and
Governments
Looking Ahead
CHAPTER OUTLINE

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The Economic Problem: Scarcity And Choice
 FIGURE 2.1 The Three Basic Questions
Every society has some system or process that transforms its scarce resources into
useful goods and services. In doing so, it must decide what gets produced, how it is
produced, and to whom it is distributed. The primary resources that must be allocated
are land, labor, and capital.

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capital Things that are produced and then used in
the production of other goods and services.
factors of production (or factors) The inputs into
the process of production. Another term for
resources.

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production The process that transforms scarce
resources into useful goods and services.
inputs or resources Anything provided by nature
or previous generations that can be used directly or
indirectly to satisfy human wants.
outputs Goods and services of value to households.

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Scarcity, Choice, And Opportunity Cost
Scarcity and Choice in a One-Person Economy
Nearly all the same basic decisions that
characterize complex economies must also be
made in a simple economy.

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The concepts of constrained choice and scarcity
are central to the discipline of economics.
Opportunity Cost
opportunity costs The best alternative that we
give up, or forgo, when we make a choice or
decision.

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The growth of the frozen dinner
entrée market in the last 50 years
is a good example of the role of
opportunity costs in our lives.
Opportunity Cost
Frozen Foods and
Opportunity Costs

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Specialization, Exchange, and Comparative Advantage
theory of comparative advantage Ricardo’s
theory that specialization and free trade will benefit
all trading parties, even those that may be
“absolutely” more efficient producers.
Scarcity and Choice in an Economy of Two or More

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 FIGURE 2.2 Comparative Advantage
and the Gains from Trade
and (b) shows how much output
they could produce in a month,
assuming they wanted an equal
number of logs and bushels.
Colleen would split her time 50/50,
devoting 15 days to each task and
achieving total output of 150 logs
and 150 bushels of food. Bill would
spend 20 days cutting wood and 10
days gathering food.
In this figure, (a) shows the number of
logs and bushels of food that Colleen
and Bill can produce for every day
spent at the task
As shown in (c) and (d), by specializing
and trading, both Colleen and Bill will be
better off. Going from (c) to (d), Colleen
trades 100 logs to Bill in exchange for
140 bushels of food.

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absolute advantage A producer has an absolute
advantage over another in the production of a
good or service if he or she can produce that
product using fewer resources.
comparative advantage A producer has a
comparative advantage over another in the
production of a good or service if he or she can
produce that product at a lower opportunity cost.
Specialization, Exchange, and Comparative Advantage

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 FIGURE 2.3a Production Possibilities
with No Trade
The figure in (a) shows all of the
combinations of logs and bushels
of food that Colleen can produce
by herself. If she spends all 30
days each month on logs, she
produces 300 logs and no food
(point A).
If she spends all 30 days on food,
she produces 300 bushels of food
and no logs (point B).
If she spends 15 days on logs and
15 days on food, she produces
150 of each (point C).
A Graphical Presentation of Comparative Advantage and Gains from Trade

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 FIGURE 2.3b Production Possibilities
with No Trade
The figure in (b) shows all of the
combinations of logs and bushels
of food that Bill can produce by
himself. If he spends all 30 days
each month on logs, he produces
120 logs and no food (point D).
If he spends all 30 days on food,
he produces 240 bushels of food
and no logs (point E).
If he spends 20 days on logs and
10 days on food, he produces 80
of each (point F).
A Graphical Presentation of Comparative Advantage and Gains from Trade

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 FIGURE 2.4 Colleen and Bill Gain from Trade
By specializing and engaging in trade, Colleen and Bill can move beyond their own production possibilities. If
Bill spends all his time producing food, he will produce 240 bushels of food and no logs. If he can trade 140
of his bushels of food to Colleen for 100 logs, he will end up with 100 logs and 100 bushels of food. The
figure in (b) shows that he can move from point F to point F'.
If Colleen spends 27 days cutting logs and 3 days producing food, she will produce 270 logs and 30 bushels
of food. If she can trade 100 of her logs to Bill for 140 bushels of food, she will end up with 170 logs and 170
bushels of food. The figure in (a) shows that she can move from point C to point C'.

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Weighing Present and Expected Future Costs and Benefits
We trade off present and future benefits in small
ways all the time.

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Capital Goods and Consumer Goods
consumer goods Goods produced for present
consumption.
investment The process of using resources to
produce new capital.

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production possibility frontier (ppf) A graph that
shows all the combinations of goods and services
that can be produced if all of society’s resources
are used efficiently.

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All points below and to the left of
the curve (the shaded area)
represent combinations of capital
and consumer goods that are
possible for the society given the
resources available and existing
technology.
Points above and to the right of the
curve, such as point G, represent
combinations that cannot be
reached.
If an economy were to end up at
point A on the graph, it would be
producing no consumer goods at
all; all resources would be used for
the production of capital. If an
economy were to end up at point B,
it would produce only consumer
goods.

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Although an economy may be
operating with full employment of its
land, labor, and capital resources, it
may still be operating inside its ppf,
at a point such as D. The economy
could be using those resources
inefficiently.
Periods of unemployment also
correspond to points inside the ppf,
such as point D.
Moving onto the frontier from a point
such as D means achieving full
employment of resources.

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 FIGURE 2.5 Production Possibility
Frontier
The ppf illustrates a number of
economic concepts. One of the
most important is opportunity
cost. The opportunity cost of
producing more capital goods is
fewer consumer goods.
Moving from E to F, the number
of capital goods increases from
550 to 800, but the number of
consumer goods decreases
from 1,300 to 1,100.

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Unemployment
During economic downturns or recessions,
industrial plants run at less than their total
capacity. When there is unemployment of labor
and capital, we are not producing all that we can.

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Inefficiency
Waste and mismanagement are the results of a
firm’s operating below its potential.
Sometimes, inefficiency results from
mismanagement of the economy instead of
mismanagement of individual private firms.

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Inefficiency
 FIGURE 2.6 Inefficiency from
Misallocation of Land in FarmingSociety can end up inside its
ppf at a point such as A by
using its resources
inefficiently.
If, for example, Ohio’s
climate and soil were best
suited for corn production
and those of Kansas were
best suited for wheat
production, a law forcing
Kansas farmers to produce
corn and Ohio farmers to
produce wheat would result
in less of both. In such a
case, society might be at
point A instead of point B.

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The Efficient Mix of Output
To be efficient, an economy must produce what
people want.
Negative Slope and Opportunity Cost
marginal rate of transformation (MRT) The
slope of the production possibility frontier (ppf).

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TABLE 2.1 Production Possibility Schedule
for Total Corn and Wheat
Production in Ohio and Kansas
Point
on ppf
Total
Corn Production
(Millions of
Bushels Per Year)
Total
Wheat 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 2.7 Corn and Wheat Production
in Ohio and Kansas
The ppf illustrates that the opportunity cost of corn
production increases as we shift resources from wheat
production to corn production. Moving from point E to D,
we get an additional 100 million bushels of corn at a cost
of 50 million bushels of wheat.Moving from point B to A, we get only 50 million bushels of corn at a cost of 100 million
bushels of wheat. The cost per bushel of corn— measured in lost wheat— has increased.

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Economic Growth
economic growth An increase in the total output
of an economy. It occurs when a society acquires
new resources or when it learns to produce more
using existing resources.

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TABLE 2.2 Increasing Productivity in Corn and Wheat Production
in the United States, 1935–2007
CORN WHEAT
Yield Per Acre
(Bushels)
Labor Hours Per
100 Bushels
Yield Per Acre
(Bushels)
Labor Hours
Per 100 Bushels
1935–1939
1945–1949
1955–1959
1965–1969
1975–1979
1981–1985
1985–1990
1990–1995
1998
2001
2006
2007
26.1
36.1
48.7
78.5
95.3
107.2
112.8
120.6
134.4
138.2
145.6
152.8
108
53
20
7
4
3
NAa
NAa
NAa
NAa
NAa
NAa
13.2
16.9
22.3
27.5
31.3
36.9
38.0
38.1
43.2
43.5
42.3
40.6
67
34
17
11
9
7
NAa
NAa
NAa
NAa
NAa
NAa
a
Data not available.
Economic Growth

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 FIGURE 2.8 Economic Growth
Shifts the PPF Up and to the Right
Productivity increases have
enhanced the ability of the
United States to produce both
corn and wheat. As Table 2.2
shows, productivity increases
were more dramatic for corn
than for wheat. Thus, the shifts
in the ppf were not parallel.
Note: The ppf also shifts if the
amount of land or labor in corn and
wheat production changes. Although
we emphasize productivity increases
here, the actual shifts between years
were due in part to land and labor
changes.
Economic Growth

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Sources of Growth and the Dilemma of Poor Countries
 FIGURE 2.9 Capital Goods and
Growth in Poor and Rich Countries
Rich countries find it easier than
poor countries to devote
resources to the production of
capital, and the more resources
that flow into capital production,
the faster the rate of economic
growth.
Thus, the gap between poor and
rich countries has grown over
time.

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The Economic Problem
Recall the three basic questions facing all
economic systems:
(1) What gets produced?
(2) How is it produced?
(3) Who gets it?
Given scarce resources, how do large, complex
societies go about answering the three basic
economic questions?

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Economic Systems
Command Economies
command economy An economy in which a
central government either directly or indirectly sets
output targets, incomes, and prices.

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Economic Systems
Laissez-faire Economies: The Free Market
laissez-faire economy Literally from the French:
“allow [them] to do.” An economy in which individual
people and firms pursue their own self-interest
without any central direction or regulation.
market The institution through which buyers and
sellers interact and engage in 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 laissez-faire economy determines what
gets produced, how it is produced, and who gets it.

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Economic Systems
consumer sovereignty The idea that consumers
ultimately dictate what will be produced (or not
produced) by choosing what to purchase (and
what not to purchase).
Consumer Sovereignty

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Economic Systems
free enterprise The freedom of individuals to
start and operate private businesses in search of
profits.
Individual Production Decisions: Free Enterprise

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Economic Systems
Distribution of Output
The amount that any one household gets depends on its
income and wealth.
Income is the amount that a household earns each year.
It comes in a number of forms: wages, salaries, interest,
and the like.
Wealth is the amount that households have accumulated
out of past income through saving or inheritance.

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Economic Systems
Price Theory
In a free market system, the basic economic questions 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.
Individuals pursuing their own self-interest will go into business
and produce the products and services that people want. Other
individuals will decide whether to acquire skills; whether to work;
and whether to buy, sell, invest, or save the income that they
earn. The basic coordinating mechanism is price.

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Economic Systems
Mixed Systems, Markets, And Governments
The differences between command economies and
laissez-faire economies in their pure forms are
enormous. In fact, these pure forms do not exist in the
world; all real systems are in some sense “mixed.”

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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

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