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THE FUNDAMENTALS OF ECONOMIC THINKING THE PRODUCTION POSSIBILITIES FRONTIER Land All the gifts of nature. The forest, minerals, and oceans proven: unproven land and everything undimmed. Labor The physical & mental talents that people contribute to the production process. Capital Goods that are produced to be used for further production. a) Physical Capital Things like machines, computers, etc. b ) Human Capital The accumulated skills/knowledge that gain through their education/training. Entrepreneur The organizing factor of production. The entrepreneur is a risk taker and is someone that has the foresight & ingenuity to bring together the factors of production. Capital Goods Goods that can be reused. Consumption Goods Goods that when you consume them once, then they are gone. TANGIBLE vs. INTANGIBLE GOODS Tangible Goods Goods that have physical form & shape Intangible Goods Goods that don’t have physical form or shape e.g. services DIVISIBLE vs. INDIVISIBLE GOODS Divisible Goods that can be brought or sold in whatever unit you want, in a smaller unit. E.g. gas Indivisible Goods that can only be brought & sold in whole units. e.g. prepackage rice. You can only buy rice in the package, you can’t split it up. eg. a movie
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SPECIALIZED vs. UNSPECIALIZED RESOURCES Specialized A resource that is better suited in the production of a particular good. Unspecialized A resource that is equally suited in the production of all goods. THE PRODUCTION POSSIBILITY FRONTIER (PPF) Our limited resources and the technologies available for transforming those resources into goods and services limit what can be produced. The limit is described by the Production Possibility Frontier. The PPF represents the possible combinations of two goods that an economy can produce in a certain period of time; under the conditions of a given state of technology, no unemployed resources and efficient production. The PPF marks the boundary between those combinations of goods and services that can be produced and those that cannot. Assumptions: 1) The are only two goods that the society produces 2) All the resources are fully utilized 3) Production is taking place efficiently The PPF represents or depicts the various combinations of two goods that a society can produce during a given time period with a given amount of resources, given state of technology with no unemployed resources and with efficient production.
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