Chapter 2. Resource Utilization

Chapter 2Resource Utilization2-1Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Chapter ObjectivesDefinition of economicsCentral fact of economicsThe four economic resourcesOpportunity costFull employmentFull productionProductive and allocative efficiencyEnabling the economy to growThe law of increasing cost2-2Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Economics DefinedEconomics is the efficient allocation of the scarce means of production toward the satisfaction of human wantsThe means of production are limitedHuman wants are unlimited2-3Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Central Fact of Economics Is SCARCITYScarcityResources are the things society uses to produce goods and servicesThese resources are scarce (limited)The economic problemThere are never enough resources to produce all of the goods and services that people want2-4Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Four Economic ResourcesLandLaborCapitalEntrepreneurial ability2-5Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.LandIncludes natural resources such as timber, oil, coal, iron ore, soil, water, as well as the ground in which these resources are foundIs used for the extraction of minerals and farmingProvides the site for factories, office buildings, shopping centers, homes, etc. Produces “rent”2-6Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.LaborThe work and time for which one is paid is what economists call “labor”Money received for one’s labor is called wages and/or salariesAbout two-thirds of the total resource cost is the cost of labor2-7Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.CapitalMan-made goods used to produce other goods or services is what economists call “capital”Examples are office buildings, stores, and factoriesThe money owners of “capital” receive is called “interest”Capital is the MOST important of the four economic resources2-8Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Entrepreneurial AbilityThe entrepreneurSets up a businessAssembles the needed resourcesRisks his/her own (or borrowed) moneyMakes a “profit” or incurs a “loss”Is central to the American economy23 million businesses are virtually all entrepreneursThe vast majority work for themselves or have one or two employees 2-9Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Our Economic Problem RevisitedLimited resources versus unlimited wantsThere are NOT enough resources to produce everything that everyone wantsTherefore, CHOICES must BE MADE!Every CHOICE has an OPPORTUNITY COST associated with it!2-10Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Opportunity Cost: An Important, Fundamental Concept in EconomicsBecause we cannot have everything we want, we must make choicesThe thing we give up (our second-best choice) is called the opportunity cost of our choiceThis is the foregone value of the next best alternativeIn the economic world, “both” is not an admissible answer to a choice of “which one”2-11Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Highest Valued AlternativeOptionsWatch TVTalk on the telephoneGo on a dateStudy economicsThe opportunity cost here is the highest valued alternative that could have been chosen (i.e., study economics)Choice madeHighest valued alternative2-12Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Inherit $40,000Bought the car(Paid $40,000)Can’t go to collegeCollege graduate (lifetime earnings) $1,300,000High School graduate (lifetime earnings) 800,000Two choices – buy a car or go to collegeOpportunity Cost$ 500,0002-13Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.California1967-1997PrisonsAdded 21 additional prisonsCollegesAdded 1 additional collegeThe Opportunity Cost of building more prisons is building fewer colleges2-14Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.California1990 - 1997Prison guards + 10,000College employees - 10,000Obviously, the opportunity cost of one additional prison is guard is one college employee 2-15Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Full EmploymentA five percent unemployment rate1From 1971 – 1996 the unemployment rate was above 5%. In recent years, this has hovered above 4 %. If it stays this low, the next edition of the textbook may adjust this to 4 %12-16Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Full ProductionAn eighty-five to ninety percent utilization rate2-17Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Underemployment of ResourcesAn unemployment rate greater than 5%A capacity utilization rate less than 85%Blue lawsFederal and state lawsNight and weekend workDiscriminationA phenomenon that has diminished but has not been eliminated entirelyProbably keeps our output 10 -15% below what it could beIf there was truly an efficient allocation of resources2-18Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Production Possibilities FrontierRepresents our economy atFull employment Full production 2-19Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Production Possibilities Frontier (PPF) measures the quantity of two goods that an economy or business is capable of producing with its current available resources and technology 2-20Point Units of Butter Units of Guns A 15 0 B 14 1 C 12 2 D 9 3 E 5 4 F 0 5Hypothetical Production ScheduleCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Production Possibilities Curve2-21Point Units of Butter Units of Guns A 15 0 B 14 1 C 12 2 D 9 3 E 5 4 F 0 5Hypothetical Production ScheduleCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Production Possibilities CurveTo gain 1 unit of GunsHad to give up 1 unit of butterWhen you are on the line (PPF), to get more of one thing you have to give up some of the other thingIn this particular instance, the opportunity cost of gaining one unit of guns was one unit of butter2-22Point Units of Butter Units of Guns A 15 0 B 14 1 C 12 2 D 9 3 E 5 4 F 0 5Hypothetical Production ScheduleCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Production Possibilities CurveTo gain 1 unit of GunsHad to give up 2 units of butterWhen you are on the line (PPF), to get more of one thing you have to give up some of the other thingIn this particular instance, the opportunity cost of gaining one unit of guns was two units of butter2-23Point Units of Butter Units of Guns A 15 0 B 14 1 C 12 2 D 9 3 E 5 4 F 0 5Hypothetical Production ScheduleCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Production Possibilities CurveTo gain 1 unit of GunsHad to give up 3 units of butterWhen you are on the line (PPF), to get more of one thing you have to give up some of the other thingIn this particular instance, the opportunity cost of gaining one unit of guns was three units of butter2-24Point Units of Butter Units of Guns A 15 0 B 14 1 C 12 2 D 9 3 E 5 4 F 0 5Hypothetical Production ScheduleCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Production Possibilities CurveTo gain 1 unit of GunsHad to give up 4 units of butterWhen you are on the line (PPF), to get more of one thing you have to give up some of the other thingIn this particular instance, the opportunity cost of gaining one unit of guns was four units of butter2-25Point Units of Butter Units of Guns A 15 0 B 14 1 C 12 2 D 9 3 E 5 4 F 0 5Hypothetical Production ScheduleCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Production Possibilities CurveTo gain 1 unit of GunsHad to give up 5 units of butterWhen you are on the line (PPF), to get more of one thing you have to give up some of the other thingIn this particular instance, the opportunity cost of gaining one unit of guns was five units of butterWhen you are on the line (PPF), to get more of one thing you have to give up some of the other thing.When you are at a point that is inside the line (PPF) it is possible to get more of both.If you were at point G, it would be possible to move to point D or any other point on the line (PPF) and get more butter and more guns.2-26Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.GPoints Inside and Outside the Production Possibilities Curve FrontierEvery point on the curve represents output at Full EmploymentEvery point inside the curve represents output at less than Full employment 2-27Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Where we usually areA RecessionA DepressionPoint W represents output at more than full employment and is currently unattainableProductive EfficiencyIs attained when the maximum possible output of one good is produced, given the output of other goodsProductive efficiency occurs only when we are operating on the production possibilities curveProductivity efficiency means that the output of one good cannot be attained with out reducing the output of some other good 2-28Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Allocative EfficiencyWhen an efficient allocation of resources is attained, it is not possible to make any person better off without making someone else worse offNo resources are wasted when allocative efficiency is attainedNo society has ever come close to allocative efficiency2-29Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Economic GrowthBest available technologyExpansion of laborMore or better trained laborExpansion of capitalMore or improved plant and equipment2-30Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Economic GrowthConsumptionAmericans are consuming too much and producing too littleIn the last 200 years to 1970 the U.S. economy averaged over 3% growth annuallySince 1970 the U.S. Economy has averaged slightly over 2% growth annually2-31Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Economic GrowthSavingAmericans are not saving enoughIn the 1960s the savings rate was 6%In 1986 the savings rate was 2%In 2000 the savings rate was negativeBusiness firms are not investing enough in new plant and equipmentPrivate individuals and the federal government are running up debt2-32Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Production Possibilities CurvesA move from PPC to PPC to PPC represents economic growth1322-33Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Production Possibilities Curves Over Time Country ACountry BCountry A represents slower economic growth than Country BCountry A capital goods is 3.8 unitsCountry B represents much faster economic growth than Country ACountry B capital goods is 7.0 units2-34Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.2-35Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.2-36Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.