Chapter 2: Production, Economic Growth, and Trade

Entrepreneurs

Combine land, labor, and capital to produce goods and services. They absorb the risk of being in business, including the risk of bankruptcy and other liabilities associated with doing business. Entrepreneurs receive profits for their effort.

Specialized Resources

EX Q: When we have a warped/bowed outward production possibility frontier it is due to which of the following?

Production Efficiency

Goods and services are produced at their lowest resource (opportunity) cost.

Capital

Includes manufactured products such as tractors, welding equipment, and computers that are used to produce other goods and services. The payment for capital is interest.

Land

Includes natural resources such as mineral deposits, oil, natural gas, water, and land in the usual sense of the word. The payment for land used as a resource is rent.

Labor

Includes the mental and physical talents of individuals who produce products and services. The payment to labor is wages.

Planned Economy (socialist and communist)

Most of the productive resources are owned by the state and most economic decisions are made by central governments. Big, sweeping decisions for the economy, often called five-year plans, are centrally made and focus productive resources on these priorities. In capitalist or market economies, private individuals and firms own most of the resources. The what, how, and who decisions are determined by individual desires for products and by profit-making decisions by firms. EX Q:uppose that you knew that in the country of Worthland the productive resources are owned by the state and that most economic decisions are made by its central government. This country has a(n):

Absolute Advantage

One country can produce more of a good than another country.

Comparative advantage

One country has a lower opportunity cost of producing a good than another country.

Resources

Productive resources include land (land and natural resources), labor (mental and physical talents of people), capital (manufactured products used to produce other products), and entrepreneurial ability (the combining of the other factors to produce products and assume the risk of the business).

Production possibilities frontier (PPF)

Shows the combinations of two goods that are possible for a society to produce at full employment. Points on or inside the PPF are attainable, and those outside of the frontier are unattainable.

Opportunity Cost

The cost paid for one product in terms of the output (or consumption) of another product that must be forgone.

Allocative Efficiency

The mix of goods and services produced is just what the society desires.

Production

The process of converting resources (factors of production)—land, labor, capital, and entrepreneurial ability—into goods and services.