Chapter 2 Economizing Scarce Resources

I. The factors of production (economic resources) and resulting income






Anything fixed (natural resources)



Physical and mental talents



Something physical to aid production (factories, computers, an educated  trained labor force



Initiative, risk taking, innovation


Note: An entrepreneur risks their own resources to make a profit while an intrapreneur has 
the responsibilities of an entrepreneur but works for someone else and does not risk their 
own capital. In the 1990's, many corporate intrepreneurs paid themselves extremely high 

salaries as if they were entrepreneurs

II. The Production Possibility Frontier (Curve)

    A. Measures how many of two types of goods can be produced.

    B. Dynamic Model (time is not constant, inputs factors and technology are not fixed, 
         growth as indicated by arrows may occur
        1. As inputs increase, growth occurs and the curve shifts right.
        2. Point S represents slow growth due to high consumption.
        3. Point R represents rapid growth due to high capital investment.
        4. The economic and political system adopted and managed by a  society determines
            the location and change of these variables.
        5. Production Possibility Frontier Frontier Video

    C. Interactive Model

    D. Opportunity costs
        1. The cost of A measured in terms of what must be foregone of B.
        2. When considering doing A, we consider the highest valued
            alternative asimited resources means we can't afford both.
        3. For more information visit the Production Possibilities Curve  from Wikipedia.
        4. Politicians seldom talk of the opportunity cost of what they plan to do.
        5. Examples
            a. The opportunity cost of good grades is the value which could have been
                received by  spending time with family and friends.
                College students video explores this example.
            b. The opportunity costs of more capital goods is the value which could have been
                received  from having more consumer goods.
            c. The Guide to Country Profiles of the CIA World Factbook, 2007 
U.S. military spending was an about 4.06% of its 2005 GDP. 
                 2. Here is a rank order of country percentages.    Rank Order
                 3. What are the opportunity costs of high military spending?
4. CIA,  Latest "The World Factbook
5. Opportunity Cost Video 5 min
                 6. Opportunity Cost Podcast from the St. Louis FED
                 7. A Lesson in Opportunity Cost



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    D. Law of increasing opportunity costs
        1. Opportunity costs usually increase.
            a. To have one unit of A you must give up amount x of B.
                To have a second unit of Item A you must give up more 
                than amount X of B.
            c. Examples
               1) Training more people in math and science would increase
                   productivity for a while but eventually people would be 
                   trained to be engineers who would be  more productive 
                   as managers, teachers, or entertainers etc.
               2) The gain from replacing people with machines may be 
                   large in the beginning but eventually machines would 
                   be used to do what people can do more efficiently.
                   a. When opportunity costs are not increasing, the 
                       production possibility curve is a straight line. High tech
                       investment may even bend the curve the other way 
                       and have decreasing cost, but not forever.
                   b. Below is an example of the trade-off between investing 
                       people in high tech industries versus entertainment 
                       industries. Suppose you have 10 entertainers and no 

                     Alternative Production Possibilities

                                                            Units of Production

     High tech                    0    1     2      3     4
                           Entertainment          10    9     7      4     0
                           Cost of an additional unit of high tech production                   
                                                               1     2     3     4
                           measured in terms of entertainment given up

                      c. Adam Sandler, a great entertainer,  probably would not 
                          of been a great computer programmer, though his dad 
                          Stan was an electrical engineer so him might be the first 
                           to move.

    2. Readings and Videos
        a. Production Possibilities Curve Constant and Increasing Opportunity Cost 
        b. AmosWEB has more.
        c. Factors of Production
        d. Quiz on Basic Terms with answer from reffonomics


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