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

I. 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 tech-
     nology 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 as .limited 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



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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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