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Unformatted text preview: Production Possibilities Production Scarcity, Tradeoffs, and Scarcity, Opportunity Cost Opportunity The Economy The The ECONOMY is the mechanism The through which resource use is organized to satisfy the desires of people living together in a society people s In any economy decisions must be In made to determine: made 1. WHAT will be produced 2. HOW will it be produced 2. 3. TO WHOM will it be distributed distributed s The Process of Production The Inputs Labor Capital Natural resources Entrepreneurship Production Technology Goods and Services 1st St. Outputs ECONOMIC MODELS ECONOMIC An economic model is a means of An explaining how a sector of the economy functions functions s Models consist of: s 1. Economic Variables s 2. Assumptions s 3. Implications 3. s Economic models are abstractions that Economic use logic to establish cause-and-effect relationships among economic variables relationships s A Model of Production Possibilities: Possibilities: Variables: Outputs of two alternative Variables: goods per year goods s Assumptions: Assumptions: s 1. Fixed quantity and quality of 1. economic resources economic s 2. Only two outputs s 3. Some inputs are specialized s 4. Technology is given s A Production Possibilities Curve Production Food per year F2 B •D Infeasible F1 F1 C • Inefficient •A Points on the Points production possibilities production curve satisfy the curve criterion of productive productive efficiency indicating the efficiency indicating maximum output of any one good given the output of the other, current the technology, and resources technology, available. 0 C2 C1 Clothing per year Implications: Implications: s If we achieve productive efficiency then If in a given period, when resources and technology are fixed, we can obtain more of one item only by sacrificing the opportunity to produce alternative items. Scarcity of resources and fixed technology limits how much we can produce in a given period produce The Tradeoff between “Guns” and “Butter” Military Goods per year (GUNS) D 1M C 1M B T 1M 0 Increasing the output of “Guns” reduces of the output of “Butter”. the The opportunity cost of one unit more of military goods increases as more are produced. A Other Goods and Other Services per year Services (BUTTER) The Law of Increasing Costs The Because some resources are Because specialized, the opportunity cost of each additional unit of output increases as more of a good is produced over a given period. given s The “bowed in” shape of the production The possibilities curve reflects the law of increasing costs increasing s An Economic Horror Story: The Great Leap Forward and Famine in China from 1958-1962 China Agricultural Products A B Industrial Equipment The Trade off Between Environmental The Quality and other Goods and Services Environmental Improvement services per year The opportunity cost of the same quantity of of environmental quality environmental improvement is higher at D than at C D Protection of the Protection environment involves environment increases in costs of increases production that raise the price of products whose price production or use results in pollution. As prices of these products rise we buy fewer of them thereby 0 trading off these items for cleaner air or water. C Other goods and services per year The Value of U.S. Resources devoted to the production of health care has increased from 6% in 1965 to 16% in 2007 from Health Care Services per Year We are giving up more for health care than we have in the past and the cost of additional health care has been increasing B= 2007 A= 1965 0 Other Goods and Services per year (Billions of Dollars) ...
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This note was uploaded on 01/28/2011 for the course EC 205 taught by Professor Hymen during the Fall '08 term at N.C. State.

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