Instructor2Commentary

Instructor2Commentary - INSTRUCTOR COMMENTARY Chapter...

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Unformatted text preview: INSTRUCTOR COMMENTARY Chapter Reference: Chapter 2 and Chapter 19 (pp. 434-445) The Production Possibilities Schedule, Opportunity Costs, and Economic Growth 1. Chapter 2 focuses on the following important topics: A. The production possibilities schedule and the basic economic problem. The production possibilities schedule indicates the maximum combinations of two goods (or product groups) that could be produced by an economic society. It measures the limits of an economy’s potential economic performance. (text, pp. 34-36) B. Determinants of the position of the production possibilities schedule. The position of the production possibilities schedule is determined by the size and quality of the economy’s resource base and the level of technology. To draw a given production possibilities schedule, one must assume fixed resources (of a given quality) , fully employed resources and unchanged technology. (text, pp. 34- 36) C. Determinants of the shape of the production possibilities schedule. The shape of the production possibilities schedule is determined by the extent to which resources used to produce one product are or are not well-suited to the production of another product. If all resources tend to be equally suitable to the production of either product, then the law of “constant” costs will be observed and the production possibilities schedule will be a straight line. On the other hand, if resources are differentially suited to the production of different products, then the production possibilities schedule will be “bowed out” (concave from the origin of the graph) and the law of increasing opportunity costs will be observed. (text, p. 37) D. The causes of economic growth. Economic growth is depicted by an outward shift of the production possibilities schedule and is caused by: (1) an increase in the number of resources; (2) an increase in the quality of resources; and (3) technological change. Economic growth cannot be “caused” by either a reduction in the unemployment rate or an increased 1 efficiency with which existing resources (of a given quality) are employed. This is the case because production on, rather than inside, the production possibilities schedule requires both “full employment” and “maximum efficiency” of resource use. Note: a reduction in the rate of unemployment, or an improvement in the efficiency with which existing resources are allocated only move the economy from a point inside to a point on the production possibilities schedule; they will not cause the entire schedule to shift. (text, pp. 37-39.) E. The costs of economic growth. A major contributor to economic growth is an increase in the size of the economy’s capital stock. This occurs through an investment expenditures by business firms. Assuming that an economy is operating on (rather than inside) its production possibilities schedule, increasing amounts of capital goods can be produced only if fewer resources are devoted to the production of consumer...
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This note was uploaded on 01/12/2012 for the course ECN 211 taught by Professor Kingston during the Spring '08 term at ASU.

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Instructor2Commentary - INSTRUCTOR COMMENTARY Chapter...

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