case chapter 02

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2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair

Prepared by:

Fernando & YvonnQuijano

2

Chapter

The Economic Problem:Scarcity and Choice


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THE ECONOMIC PROBLEM:SCARCITY AND CHOICE

FIGURE 2.1The Three Basic Questions

Three basic questions must be answered in

order to understand an economic system:

What gets produced?

How is it produced?

Who gets what is produced?


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capitalThings that are themselvesproduced and that are then used in theproduction of other goods and services.

factors of production (or factors)Theinputs into the process of production.Another word for resources.


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productionThe process thattransforms scarce resources into usefulgoods and services.

inputsorresourcesAnything providedby nature or previous generations thatcan be used directly or indirectly tosatisfy human wants.

outputsUsable products.


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SCARCITY, CHOICE, AND OPPORTUNITY COST

SCARCITY AND CHOICE IN AONE-PERSON ECONOMY

Nearly all the same basic decisions

that characterize complex economiesmust also be made in a simpleeconomy.


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The concepts ofconstrained choiceandscarcityare central to thediscipline of economics.

Opportunity Cost


opportunity costsThe best alternativethat we give up, or forgo, when we makea choice or decision.


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SCARCITY AND CHOICE IN ANECONOMY OF TWO OR MORE

Education takes time. Timespent in the classroom hasan opportunity cost.


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Weighing Present and Expected Future Costsand Benefits

We trade off present and future

benefits in small ways all the time.


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Capital Goods and Consumer Goods

consumer goodsGoods produced forpresent consumption.

investmentThe process of usingresources to produce new capital.

Because resources are scarce, the opportunity cost of every investment in capital is

forgonepresent consumption.


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production possibility frontier (ppf)Agraph that shows all the combinations of

goods and services that can beproduced if all of societys resources areused efficiently.

THE PRODUCTION POSSIBILITY FRONTIER


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FIGURE 2.3Production Possibility Frontier


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Unemployment

During economic downturns orrecessions, industrial plants run at less

than their total capacity. When there isunemployment of labor and capital, weare not producing all that we can.


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Economic Growth

economic growthAn increase in thetotal output of an economy. It occurs

when a society acquires new resourcesor when it learns to produce more usingexisting resources.


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TABLE 2.2Increasing Productivity in Corn and Wheat Production in the United States,

19352006

CORN WHEAT

Yield Per Acre

(Bushels)

Labor Hours Per

100 Bushels

Yield Per Acre

(Bushels)

Labor Hours

Per 100 Bushels

19351939

19451949

19551959

19651969

19751979

1981198519851990

19901995

1998

2001

2006

26.1

36.1

48.7

78.5

96.3

107.2112.8

120.6

134.4

138.2

145.6

108

53

20

7

4

3NAa

NAa

NAa

NAa

NAa

13.2

16.9

22.3

27.5

31.3

36.938.0

38.1

43.2

43.5

42.3

67

34

17

11

9

7NAa

NAa

NAa

NAa

NAa


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THE ECONOMIC PROBLEM

Recall the three basic questions facingall economic systems:

(1) What gets produced?(2) How is it produced?(3) Who gets it?

Given scarce resources, how exactlydo large, complex societies go aboutanswering the three basic economicquestions?


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ECONOMIC SYSTEMS

LAISSEZ-FAIRE ECONOMIES: THE FREEMARKET

laissez-faire economyLiterally fromthe French: allow [them] to do. An

economy in which individual people andfirms pursue their own self-interestswithout any central direction orregulation.

marketThe institution through whichbuyers and sellers interact and engagein exchange.

Some markets are simple and others are complex, but they all involve buyers and sellers

engaging in exchange. The behavior of buyers and sellers in a laissez-faire economy

determines what gets produced, how it is produced, and who gets it.


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ECONOMIC SYSTEMS

Distribution of Output

The amount that any one householdgets depends on its income and wealth.

Incomeis the amount that a householdearns each year. It comes in a number offorms: wages, salaries, interest, and thelike.

Wealthis the amount that householdshave accumulated out of past incomethrough saving or inheritance.


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ECONOMIC SYSTEMS

MIXED SYSTEMS, MARKETS, ANDGOVERNMENTS

ven staunch defenders of the free enterprise system recognize that market systems are

not

perfect. !irst, they do not always produce what people want at lowest cost"there are

inefficiencies. Second, rewards #income$ may be unfairly distributed, and some groups maybe left out Third periods of unemployment and inflation recur with some regularity

The differences between commandeconomies and laissez-faire economies intheir pure forms are enormous. In fact,these pure forms do not exist in the world;all real systems are in some sensemixed.

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