Economics Chapter 2

Intensive growth

when more output is created from the same amount of inputs, which is known as increased productivity. This leads to higher per capita incomes and standards of living.

Extensive growth

occurs from more inputs leading to more output.

BASIC ECONOMIC QUESTIONS AND PRODUCTION

-Every economy must decide what to produce, how to produce it, and who will receive what is produced. Production is the process of converting factors of production (resources)—land, labor, capital, and entrepreneurial ability—into goods and services. -To the economist, land includes both land and natural resources. Labor includes the mental and physical resources of humans. Capital includes all manufactured products used to produce other goods and services. Entrepreneurs combine resources to manufacture products, and they assume the risk of doing business. -Production efficiency requires that products be produced at the lowest cost. Allocative efficiency occurs when the mix of goods and services produced is just what society desires.

USING CONSUMER AND PRODUCER SURPLUS: THE GAINS FROM TRADE

-The sum of consumer surplus and producer surplus is total surplus, a measure of the overall net benefit for an economy. -Markets are efficient when all buyers and all sellers willing to buy and sell at the market price are able to do so. -When buyers and sellers engage in a market transaction, gains from trade are created from consumer surplus and producer surplus. -Total surplus is maximized when the market is in equilibrium. -Deadweight loss is created when markets deviate from equilibrium.

1. Which point is likely to result in the most economic growth for Mauistan? 2. Which statement the tradeoff between today's consumption and future consumption?

1. A 2. A. The production of more capital goods and fewer consumer goods today increases economic growth and future consumption

Assume Italy and Egypt can both produce grain and dates and that the only limited resource is the farming labor force, with land, water, and all other resources plentiful in both countries. Each farmer in Italy can produce 10 tons of grain or 5 tons of dates in season. Each farmer in Egypt can produce 10 tons of grain or 25 tons of dates. 1. Which country has the absolute advantage in producing dates? 2. Which country has the comparative advantage in producing dates? 3. Which country has the absolute advantage in producing grain? 4. Which country has the comparative advantage in producing grain?

1. A EGYPT 2. A EGYPT 3. C NIETHER 4. B ITALY

Kate has an absolute advantage in? Sarah has an absolute advantage in?

1. Neither good 2. Both goods

Suppose Ned can produce either potato chips of computer chips. If he only produces potato chips he can produce 50 in a day. If he only produces computer chips he can produce 25 in a day. Drag the endpoints of the line to plot his PPF on the graph.

2

When can an economy increase the production of one good without reducing the output of another? When the economy is operating at?

A point below the PPF

Autarky

A policy of self-reliance, avoiding or minimizing trade and trying to produce everything one needs (or the most vital things) by oneself.

Price Ceiling

A price ceiling is a maximum price for a good. A binding price ceiling appears below the equilibrium price and causes a shortage.

price floor

A price floor is a minimum price for a good. A binding price floor appears above the equilibrium price and causes a surplus.

In a competitive market, all of the choices along with the PPF what kind of efficiency, while the specific choice on the frontier that society picks the one with

A. Productive; alLocative

Allocative efficiency

Allocative efficiency occurs when the mix of goods and services produced is the most desired by society. In capitalist countries, this is determined by consumers and businesses and their interaction through markets

Use the graph of a PPF Which point demonstrates productive efficiency? At which point on the graph is it possible to produce more tangerines without reducing the quantity of bananas that are also produced?

C A

Production, Economic, Growth, and Trade-Work it out Question 1 of 2 Use the data from the table _____ has the absolute advantage in producing skis and _____ has the absolute advantage in producing sleds

Denmark, Denmark

Entrepreneurial Ability

Entrepreneurs combine land, labor, and capital to produce goods and services, and they assume the risks associated with running a business. Entrepreneurs combine and manage the inputs of production and manage the day-to-day marketing, finance, and production decisions. The risks of running a business are often significant, including the possibility of bankruptcies and lawsuits. Globalization has opened many opportunities as well as risks. For undertaking these activities and assuming the risks associated with business, entrepreneurs earn profits.

Land

For economists, the term land includes both land in the usual sense as well as all other natural resources that are used in production. Natural resources such as mineral deposits, oil and natural gas, and water are all included by economists in the definition of land. Economists refer to the payment for use of land as a resource as rent.

Resources and Production

Having examined the three basic economic questions, let's take a look at the production process. Production involves turning resources into products and services that people are willing and able to buy. Let's begin our discussion of this process by examining the scarce resources used to produce goods and services.

The PPF for Honduras and Brazil, representing hypothetical levels of production, are shown in the graphs. Assume that, without trade, each country is initially producing and consuming at point A on its PPF Curve. Suppose the countries decide to trade. Each country will specialize in the production of the good for which it has a comparative advantage. Which good will each country produce?

Honduras will produce steel and brazil will produce bananas.

In which of the basic questions facing any society does technology play the greatest role

How to produce question

Which of the following factors can contribute to an economy's growth?

Improvements in land, labor, and capital.

Opportunity Cost: _____ pecans Opportunity Cost: _____ pecans This PPF exhibits what kind of opportunity?

Increasing 1400 3600

Labor

Labor as a factor of production includes both the mental and physical talents of people. Few goods and services can be produced without labor resources. Improvement to labor capabilities from training, education, and apprenticeship programs—typically called "human capital"—all add to labor's productivity and ultimately to a higher standard of living. Labor is paid wages.

In the US heavy street-cleaning machines driven by one person sweep the streets. In China and India, groups of people use brooms to do the same job. Explain this difference in techniques occurs. The difference occurs because:

Labor resources in Chine and India are relatively more abundant than capital.

If Mary can bake a cake at a lower opportunity cost than Sarah can, then:

Mary has a comparative advantage in baking cakes

comparative advantage

One country has a comparative advantage in producing a good if its opportunity cost is lower than another country's opportunity cost for that good.

why would markets not achieve equilibrium?

One reason is because governments may choose to intervene in markets to achieve an outcome that may be more socially desirable or equitable, even at the cost of deadweight loss that results.

Production efficiency

Production efficiency occurs when the mix of goods is produced at the lowest possible resource or opportunity cost. Alternatively, production efficiency occurs when as much output as possible is produced with a given amount of resources. Firms use the best technology available and combine the other resources to create products at the lowest cost to society.

The table shows the tons of steel or number of computers a worker can produce per day in Germany and South Korea. Use this table to answer the question. Germany should?

Specialize in steel production, export steel, and import computers.

absolute advantage

The Dominican Republic has an absolute advantage over Haiti in producing both products. An absolute advantage exists when one country can produce more of a good than another country using the same amount of resources.

Total Surplus

The sum of consumer surplus and producer surplus; it is a measure of the overall net benefit gained from a market transaction.

The Law of Supply: The Relationship Between Quantity Supplied and Price

What explains this relationship? As we saw in the previous chapter, businesses inevitably encounter rising opportunity costs as they attempt to produce more and more of a product. This is due in part to diminishing returns from available resources and in part to the fact that when producers increase production, they must either have existing workers put in overtime (at a higher hourly pay rate) or hire additional workers away from other industries (again at premium pay). Producing more units, therefore, makes it more expensive to produce each individual unit. These increasing costs give rise to the positive relationship between product price and quantity supplied to the market. Unfortunately for producers, they can rarely charge whatever they would like for their products; they must charge whatever the market will permit. But producers can decide how much of their product to produce and offer for sale. The law of supply states that higher prices will lead producers to offer more of their products for sale during a given period. Conversely, if prices fall, producers will offer fewer products to the market. The explanation is simple: The higher the price, the greater the potential for higher profits and thus the greater the incentive for businesses to produce and sell more products. Also, given the rising opportunity costs associated with increasing production, producers need to charge these higher prices to increase the quantity supplied profitably.

The three basic economic questions that each society must answer are:

What goods and services are to be produced? How are these goods and services to be produced? Who will receive these goods and services?`

Capital

•Capital includes all manufactured products that are used to produce other goods and services. This includes equipment such as drill presses, blast furnaces for making steel, and other tools used in the production process. It also includes trucks and automobiles used by businesses, as well as office equipment such as copiers, computers, and telephones. Any manufactured product that is used to produce other products is included in the category of capital. The payment to owners of capital is interest. •Note that the term "capital" as used by economists refers to real (or physical) capital—actual manufactured products used in the production process—not money or financial capital. Money and financial capital are important in that they are used to purchase the real capital that is used to produce products.

Production Possibility Frontier (PPF)

•Diminishing Returns •Concave shape Increasing the amount of resources shifts the PPF outward •Increasing Labor and Human Capital Higher Savings increases the rate of growth (assuming it was invested properly) Capital Accumulation increases growth path

Opportunity Cost

•The value of the next best alternative; what you give up to do something or purchase something. •What you could have produced INSTEAD of what you are producing now.