A. Factors of Production
|
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 |
B. The Production Possibility Frontier (Curve) measures how many of two types of goods can be produced.
1.
Static Model (time is
constant, inputs are fixed)
a. Consumer goods such
as televisions, pizzas, and social security bring current
satisfaction.
b. Capital goods such as
machinery, tractors, and improved technology increase
future productive capabilities.
c. Point F on the
production possibility frontier represents full employment of dll resources
(100% efficiency).
d. Point U represents
unemployment of some economic resources.
e. Having more capital
goods requires giving up some consumer goods.
f. Applies to individuals
as you can invest by building a deck or going to school or you can go on an
expensive vacation.
g. How society and
individuals answer these economic questions is explored in chapters five and
six.
2. Dynamic Model
(time is not constant,
inputs like factors and technology are not fixed, growth indicated by, arrows
occur
a. As inputs increase, growth
occurs and the curve shifts right.
b. Point S represents slow
growth due to high consumption.
c. Point R represents rapid
growth due to high capital investment.
d. Economic and political
system chosen and run by a society determines the location and movement of
these variables
3.Opportunity costs
a. The cost of Item A measured in
terms of what must be foregone of Item B.
b. When considering doing A, we
consider the highest valued alternative as limited resources means we can't afford
both.
c. For more information visit
the
Production Possibilities Curve from Wikipedia.
d. Politicians seldom talk of the
opportunity cost of what they plan to do.
e. Examples
1.
The opportunity cost of good grades is the value which could have been received by
spending time with family and friends.
2.
The opportunity costs of more capital goods is the value
which could have been received from having more consumer
goods.
4.
Law of increasing opportunity costs
a. Opportunity costs usually increase.
1. 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.
2.
Primary reason for increasing costs is resources are not perfect substitutes.
3. Examples
a)
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.
b) 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.
c. 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.
Alternative Production Possibilities for10 entertainers and no
technicians'.
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
Adam Sandler, a great entertainer, probably would not of been a
great computer programmer,
though his dad Stan, was an electrical engineer, his sister
Elizabeth is a dentist, and his brother Scott is a lawyer Adam might be the
first resource to move.
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