141_Chapter_2_Lecture - 2 The Economic Problem: Scarcity...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
2 The Economic Problem: Scarcity and Choice OUTLINE OF TEXT MATERIAL I. Introduction This chapter explores the questions of what, how, and for whom to produce. “Human wants are unlimited, but resources are not.” This creates scarcity. Scarcity, in turn, forces us to make choices. A. Resources is used in its broadest sense, including everything from natural resources (timber, minerals, energy), capital (buildings, machines), labor (human capital), and entrepreneurship. Resources are also called factors of production , inputs , or simply factors . Output is what is produced. Economists usually include land, labor, and capital as factors of production. B. The chapter then proceeds to some key definitions: 1. Factors of production ( factors ) are the inputs into the production process. The text uses factors and resources interchangeably. 2. Production is the transformation of resources into goods and services. 3. Resources (inputs) are used directly or indirectly to satisfy human wants. 4. Capital includes buildings, machines, and other things that are produced in order to produce other goods and services. 5. Producers are those who transform resources into outputs (final goods and services). 6. Outputs are usable products. II. Scarcity, Choice, and Opportunity Cost A. Scarcity and Choice in a One-Person Economy 1. Bill must make choices about how to allocate resources, what to produce, and how to produce it. Bill’s situation is “constrained choice.” His main constraint is available time. Bill must decide what goods and services he wants to produce, 13
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Principles of Macroeconomics what he is able to produce given the island’s resources, and how to use the resources to produce what he wants. 2. Opportunity cost is the value of the best alternative that one gives up when making a choice. B. Scarcity and Choice in an Economy of Two or More 1. Now there are two decision makers (Bill and Colleen). Their preferences, skills, and abilities probably differ. They will have to decide how much of each good each person should produce. They will probably benefit from specialization and trade. 2. Specialization, Exchange, and Comparative Advantage: David Ricardo formulated the theory of comparative advantage. He was the first to discover that specialization and free trade will benefit all trading partners. Even if one producer can produce more of both goods, mutually beneficial trade may still be possible if the relative difference is greater for one product than the other. Ricardo’s most important point is that everyone—every individual, firm, and country—has a comparative advantage at something even if another has an absolute advantage at producing all goods and services . Trade and specialization allow the most efficient producer to produce each good. This increases productivity and aggregate output. “Learning by doing” means specialization will improve each worker’s job skills leading to further productivity increases. 3.
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 06/15/2010 for the course EC 141DLC taught by Professor Antonifirner during the Fall '09 term at Park.

Page1 / 6

141_Chapter_2_Lecture - 2 The Economic Problem: Scarcity...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online