Principles of Economics - Chapter 2 PDF

Principles of Economics Thirteenth Edition Chapter 2 The Economic Problem: Scarcity and Choices Copyright © 2020, 2016, 2011 Pearson Education, Inc. All R...

Principles of Economics Thirteenth Edition Chapter 2 The Economic Problem: Scarcity and Choices Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved Chapter 2 The Economic Problem: Scarcity and Choice (1 of 2) – What gets produced? – How is it produced? – Who gets what is produced? Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved  Chapter 2 The Economic Problem: Scarcity and Choice (2 of 2) capital factors of production (factors) – land, labor, and capital production inputs or resources outputs Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved 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. Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved 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 A person must decide what to produce and how and when to produce it. Opportunity Cost The concepts of constrained choice and scarcity are central to the discipline of economics. Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved Scarcity and Choice in an Economy of Two or More 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. 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 (a lower absolute cost per unit). 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. Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved Figure 2.2 Comparative Advantage and the Gains from Trade Coleen can produce either: 10 BASKETS OF WOOD OR 10 BASKETS OF FOOD Bill can produce either: 4 BASKETS OF WOOD OR 8 BASKETS OF FOOD Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved Figure 2.2 Comparative Advantage and the Gains from Trade Panel (a) shows the best Colleen and Bill can do each day, given their talents and assuming they each wish to consume an equal amount of food. Panel (b) shows what happens when both parties specialize. Notice that more units of each good are produced. Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved Figure 2.3 Production Possibilities with and without Trade Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved The Production Possibility Frontier 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. Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved Figure 2.4 Capital goods Consumer goods Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved The Production Possibility Frontier The Law of Increasing Opportunity Cost Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved Table 2.1 Production Possibility Schedule for Total Corn and Wheat Production in Ohio and Kansas Point on ppf Total Corn Production (Millions Total Wheat Production of Bushels Per Year) (Millions of Bushels Per Year) A 700 100 B 650 200 C 510 380 D 400 500 E 300 550 Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved Figure 2.6 Inefficiency from Misallocation of Land in Farming Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved Figure 2.8 Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved The Economic Problem Recall the three basic questions facing all economic systems: – What gets produced? – How is it produced? – Who gets it? Given scarce resources, how do large, complex societies go about answering the three basic economic questions? Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved Economic Systems and the Role of Government Command Economies Laissez-Faire Economies: The Free Market Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved Economic Systems and the Role of Government Consumer Sovereignty Individual Production Decisions: Free Enterprise Price Theory Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved Review Terms and Concepts absolute advantage laissez-faire economy capital market command economy opportunity cost comparative advantage outputs consumer goods production economic growth production possibility factors of production (or frontier (ppf) factors) theory of comparative inputs or resources advantage Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved