Econ Chap 2 - CHAPTER 2 Economic Tools and Economic Systems...

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Unformatted text preview: CHAPTER 2 Economic Tools and Economic Systems Choice and Opportunity Cost Scarcity Makeachoice Opportunitycost The Opportunity Cost of College Valueofbestalternativeforgone Forgoneincome(fulltimejob;$20,000) Minusincomeearnedasastudent (parttimework:$10,000) Plusdirectcostofcollege Tuition,fees,books($6,000) $20,000$10,000+$6,000=$16,000 Notincluded:room,board,personal expenses Opportunity Cost Opportunitycostissubjective Calculatingopportunitycost Time:theultimateconstraint Opportunitycostvarieswith circumstance Sunk Cost and Choice Sunkcost Economicdecisionmakers Law of Comparative Advantage Specializeinthetaskthatyoudobetter Lawofcomparativeadvantage Specializationandexchange Absoluteadvantage Specialization and Exchange Barter Money Division of Labor Divisionoflabor Specialization;Increasedproductivity Downside: Efficiency and the PPF ProductionPossibilitiesFrontier(PPF) Assumptions Output:consumerandcapitalgoods Productions:1year Fixedresources(quantity,quality) Fixedtechnology Fixed`rulesofthegame' Resourcesscarcefortheeconomy Economy'sproductionoptions Efficiency and the PPF PPF Inefficientcombinations Unattainablecombinations ProductionPossibilitiesFrontier(PPF) Consumergoods(millionsofunitsperyear) 50 48 43 34 30 20 10 A B C D Inefficient I E U Unattainable The Economy's Production Possibilities Frontier PPF(AF):Economyusesall resourcesandtechnology efficiently PPF:bowedout;lawof increasingopportunitycost Inefficient:insidePPF F 0 40 50 10 20 30 Capitalgoods(millionsofunitsperyear) Unattainable:outsidePPF The Shape of the PPF MovementdownalongPPF Bowedoutshape Lawofincreasingopportunitycosts SlopeofPPF What Can Shift the PPF? Economicgrowth Expansionintheeconomy'sPPF 1. Changesinresourceavailability OutwardshiftofPPFincreasein: Size,healthoflaborforce Skillsoflaborforce Availabilityofotherresources 2. Increasesincapitalstock Moreoutput;outwardshiftofPPF What Can Shift the PPF? 3. Technologicalchange Employsresourcesmoreefficiently OutwardshiftofPPF 5. Improvementsintherulesofthegame Formalandinformalinstitutions Economicgrowth OutwardshiftofPPF Exhibit2(a),(b) Shifts of the Economy's Production Possibilities Frontier (a)Increaseinavailableresources A' Consumergoods A Consumergoods F F' Capitalgoods (a) OutwardshiftofPPFincreaseinavailable resources;bettertechnology enhancedproductionofbothcapitaland consumergoods (b)Decreaseinavailableresources A A' F' F Capitalgoods (b)InwardshiftofPPFdecreaseinavailable resources decreasedproductionofbothcapitaland consumergoods LO3 Exhibit2(c),(d) (d)Increaseinresourcesor technologicaladvancethat benefitscapitalgoods Consumergoods Shifts of the Economy's Production Possibilities Frontier (c)Increaseinresourcesortechnological advancethatbenefitsconsumergoods Consumergoods A' A A F Capitalgoods F' Capitalgoods F What We Learn from the PPF? Efficiency Scarcity Opportunitycost Lawofincreasingopportunitycost Economicgrowth Choice EconomicSystems Threequestions What? How? ForWhom? Economicsystem Mechanisms Institutions Answerthethreequestions EconomicSystems Criteria Ownershipofresources Allocationofresources Incentives Rangefrom Purecapitalism,to Purecommandsystem PureCapitalism Privatepropertyrights Unrestrictedmarkets Answerthethreequestions Resourcesmostproductiveuse Goodsandservicesmostvalued Voluntarybuyingandselling PureCapitalism Nocentralauthority Peoplewithnoresourcescouldstarve Monopoly Sideeffectsforpeoplenotinvolved Nopublicgoods PureCommandSystem Public/communalownershipofproperty Governmentplanners Centralplans Directresources Coordinateproduction Answerthethreequestions Communism PureCommandSystem:Flaws Resources Usedinefficiently Wasted(noincentives) Preferencesofplanners Limitedvarietyofproducts Lessfreedomofeconomicchoice MixedandTransitionalSystems Increasingroleofgovernment Incapitalisteconomies Increasingroleofmarkets Incommandeconomies Mixedeconomies Government Economicactivity Regulatestheprivatesector Economiesbasedoncustomorreligion ...
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