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Chapter 2 
Economizing Scarce Resources
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  Editors Notes: 
  A. McConnell Economics Books, including the 18th edition, is one of many sources of material included in this chapter.
  B. Our Current Events Internet Library

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

Factor

Definition

Income

Land

Anything fixed (natural resources)

Rent

Labor

Physical and mental talents

Wages

Capital

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

Interest

Enterprise

Initiative, risk taking, innovation

Profit

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) measures how many of
    two types of goods can be produced.
 
   A. Dynamic Model (time is not constant, inputs like 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 movement of thes
e variables.
         5
. Production Possibility Frontier Frontier Video
     B. Interactive Model
 

 

 

 

 

 

 

 

 

 

   C. Opportunity costs
     
1. The cost of Item A measured in terms of what must be foregone of Item 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 for 2007 reports
                1.
U.S. military spending was an estimated 4.06% of its 2005 GDP. 
                2. Here is a rank order of country percentages.    Rank Order
                3. What are the opportunity costs associated with high military spending?
               
4. CIA,  Latest "The World Factbook
        
6.
Opportunity Cost Video reviews thee principles with a 5-minute lecture.
         7. Opportunity Cost Podcast from the St. Louis Fed

Free Book Summaries- 3 New York Times Bestsellers

    D. Law of increasing opportunity costs
        
1. Opportunity costs usually increase.
             a. To have one unit of Item A you must give up amount X of Item B.
                 To have a second unit of Item A you must give up more
than amount X of Item B.
             b. Primary reason for increasing costs is resources are not perfect substitutes.
            
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.
                 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 technicians

                     Alernative 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. Econ id 60 Seconds: Production Possibilities Curve Constant and Increasing Opportunity Cost 
         3. AmosWEB has more.
         4. Factors of Production
         5. Quiz on Basic Terms with answer. from reffonomics

 

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