Production-Possibilities-and-Opportunity-Cost.pdf

Production Possibilities and Opportunity Cost Resources, Technology and Production possibilities Labor - It is a crucial input that determines the quantity and quality of outputs Capital - It enhances the productivity of labor. Natural Resources - It is used in crude form during the pr...

Production Possibilities and Opportunity Cost Resources, Technology and Production possibilities Labor - It is a crucial input that determines the quantity and quality of outputs Capital - It enhances the productivity of labor. Natural Resources - It is used in crude form during the production process. Entrepreneurship - It is a crucial driver of innovation and economic growth Input - Output - Cost Production is the process of using the services of labor and other resources to make goods and services available. These goods and services are the outputs while the economic resources are the inputs. Technology is the knowledge of how to produce goods and services. It helps us alleviate scarcity. Assumption is a process of examining/analyzing the relationship between the production of goods and services and the availability and use of resources, 1. The quantity and quality of economic resources available for use during the year are fixed. 2. There are no broad classes of outputs we can produce with available economic resources. Example: food and clothing. 3. Some inputs are better adapted to the production of one product than to the production of another. The more specialized a worker, the higher the opportunity cost of transferring him or her to another line of work. 4. Technology is fixed and it does not advance during the year. Production Possibilities Curve 1 Production Possibility Curve Shows the maximum possible output of the good that can be produced with available resources, given the output of the alternative good over a period. 2 Specialized Inputs Some inputs are better adapted to the production of one product than another, and the more specialized a worker, the higher the opportunity cost of transferring them to a different line of work. 3 Increasing Opportunity Cost The Law of Increasing Costs states that the opportunity cost of each additional unit of output of a good increases as more of that good is produced, due to the specialization of resources. Globalizations: Gains from International Trade Opportunity Cost If the opportunity cost of importing an item is lower than the 1 opportunity cost of producing it domestically, a nation can enjoy a net gain from international trade. Principle of Comparative Advantage By specializing in goods where they can produce 2 domestically at lower opportunity cost, countries can increase their overall consumption possibilities. Mutual Gains There are mutual gains for trading partners when they 3 specialize in producing items for which they enjoy a comparative advantage. Law of Absolute Advantage Definition Implications Example The ability of a party to produce If a party has no absolute Country C has an absolute more of a good or service than advantage in anything, then advantage over both Country A and competitors, using the same according to the theory of absolute Country B in the production of amount of resources. advantage, no trade will occur with parts, as it can produce the most the other party. However, the gains parts per hour with the same Adam Smith from trade may not be mutually number of workers. beneficial. Law of Comparative Advantage 1 Definition States that two countries can both gain from trade, if in the absence of trade, they have different relative costs for producing the same goods. The ability of a party to produce a particular good or service at a lower opportunity cost. David Ricardo 2 Principle Even if one country is more efficient in the production of all goods (absolute advantage), it can still gain by trading with a less-efficient country, as long as they have different relative efficiency. 3 Example In the example of the two men on an isolated island, the younger man has an absolute advantage in all tasks, but both men can benefit by specializing according to their comparative advantage. Production Efficiency Division of Labor Technological Advances Resource Utilization Division of labor is the breakdown Advances in technology, such as The production possibilities curve of a large process into tasks the development of new illustrates the consequences of performed by workers who production methods and under-utilizing or mismanaging specialize in those tasks. This equipment, can significantly economic resources, and the allows for increased proficiency and increase the productive potential of importance of achieving production the use of mass production an economy and drive economic efficiency. technologies. growth. Sources of Economic Growth Increased Resources Expanding the quantities of labor, capital, and natural resources available can increase the overall production possibilities of an economy. Resource Quality Improving the skills, education, and training of the labor force can also enhance the quality and productivity of economic resources. Technological Progress Advances in technology, such as the development of new production methods and equipment, are a crucial driver of economic growth and increased productive potential. Measuring Economic Growth GDP Growth Economic growth is conventionally measured as the percent rate of increase in real gross domestic product (GDP), which reflects the expansion of production possibilities over time. Inflation Adjustment Real GDP, which is adjusted for inflation, is used to net out the effect of rising prices and provide a more accurate measure of the growth in the quantity of goods and services produced. Full Employment Economic growth is typically measured in terms of the growth of potential output, which is the level of production at full employment, rather than just observed output.