PRINCIPLE OF ECONOMIC
6 EDITION
KARL CASE, RAY FAIR
PRENTICE HALL BUSINESS PUBLISHING
COPY RIGHT 2002
What is Production?
•
Production
is the process by which resources are transformed into useful forms.
•
Resources,
or inputs, refer to anything provided by nature or previous
generations that can be used directly or indirectly to satisfy human wants.
•
Capital resources
•
Human resources
•
Natural resources
Three Basic Questions
•
The mechanics of decision making in a
larger economy are more complex, but the type of decisions that must be made
are nearly identical.
•
All societies must decide:
•
What
will be produced?
•
How
will it be produced?
•
Who
will get what is produced?
Specialization, Exchange and Comparative Advantage
•
David Ricardo developed the theory
of comparative advantage to explain the benefits of specialization and
free trade. The theory is based on the
concept of opportunity cost:
•
Opportunity cost
is that which we give up or forgo, when we make a decision or a choice.
•
According to the theory of
competitive advantage, specialization and free trade will benefit all
trading parties, even those that may be absolutely more efficient producers.
Absolute Versus Comparative Advantage
Output per Day of Work
|
||
Food
|
Clothing
|
|
Country A
|
6
|
3
|
Country B
|
1
|
2
|
•
Country A has an absolute
advantage because it can produce more food and more clothing in one day
than country B.
•
Country A has a comparative
advantage in the production of food because a worker in country A can
produce 6 times as many units of food as a worker in country B, but only 1.5 as
many units of clothing.
Absolute Versus Comparative Advantage
Output per Day of Work
|
||
Food
|
Clothing
|
|
Country A
|
6
|
3
|
Country B
|
1
|
2
|
•
The opportunity costs can be summarized
as follows:
•
For food:
•
1 unit of food costs country A ½ unit of
clothing.
•
1 unit of food costs country B 2 units
of clothing.
•
For clothing:
•
1 unit of clothing costs country A 2
units of food.
•
1 unit of clothing costs country B ½
unit of food.
Absolute Versus Comparative Advantage
Output per Day of Work
|
||
Food
|
Clothing
|
|
Country A
|
6
|
3
|
Country B
|
1
|
2
|
•
The production possibility frontier
curve has a negative slope that indicates the trade-off that a society faces
between two goods.
•
The slope of the ppf is also called the marginal
rate of transformation (MRT).
The Production Possibility Frontier
•
The production possibility frontier
curve has a negative slope that indicates the trade-off that a society faces
between two goods.
•
The slope of the ppf is also called the marginal
rate of transformation (MRT).
The Production Possibility Frontier
•
Points inside of the curve are
inefficient.
•
At point H, resources are either
unemployed, or are used inefficiently.
The Production Possibility Frontier
•
Point F is desirable because it
yields more of both goods, but it is not attainable given the amount of
resources available in the economy.
The Production Possibility Frontier
•
Point C is one of the possible
combinations of goods produced when resources are fully and efficiently
employed.
The Production Possibility Frontier
•
A move along the curve illustrates the
concept of opportunity cost.
•
In order to increase the production of
capital goods, the amount of consumer goods will have to decrease.
The Law of Increasing Opportunity Cost
•
The concave shape of the
production possibility frontier curve reflects the law of increasing
opportunity cost.
•
As we increase the production of one
good, we sacrifice progressively more of the other.
Economic Growth
•
Economic growth
is an increase in the total output of the economy. It occurs when a society acquires new
resources, or when it learns to produce more using existing resources.
•
The main sources of economic growth are
capital accumulation and technological advances.
Economic Growth
•
Outward shifts of the curve represent economic
growth.
•
To increase the production of one good
without decreasing the production of the other, the PPF curve must shift
outward.
•
From point D, the economy can choose any
combination of output between F and G.
Economic Growth
•
Not every sector of the economy grows at
the same rate.
•
In this historic example, productivity
increases were more dramatic for corn than for wheat over the 50-year period.
The Economic Problem
•
The economic problem: Given scarce resources, how, exactly, do
large, complex societies go about answering the three basic economic questions?
•
Economic systems
are the basic arrangements made by societies to solve the economic
problem. They include:
•
Command economies
•
Laissez-faire economies
•
Mixed systems
•
In a command economy, a
central government either directly or indirectly sets output targets, incomes,
and prices.
•
In a laissez-faire economy,
literally from the French: “allow (them) to do,” individual people and
firms pursue their own self-interests without any central direction or
regulation. The central institution of a
laissez-faire economy is the free-market system.
•
A market is the institution
through which buyers and sellers interact and engage in exchange.
Laissez-Faire Economies: The Free Market
•
Consumer sovereignty is
the idea that consumers ultimately dictate what will be produced (or not
produced) by choosing what to purchase (and what not to purchase).
•
Free enterprise: under a free market system, individual producers
must figure out how to plan, organize, and coordinate the production of
products and services.
•
The distribution of output
is also determined in a decentralized way.
The amount that any one household gets depends on its income and wealth.
•
The basic coordinating mechanism in a
free market system is price. Price
is the amount that a product sells for per unit. It reflects what society is willing to pay.
Mixed Systems, Markets, and Governments
Markets are not perfect, and governments play a major
role in all economic systems in order to:
•
Minimize market inefficiencies
•
Provide public goods
•
Redistribute income
•
Stabilize the macroeconomy
•
Promote low levels of unemployment
•
Promote low levels of inflation
No comments:
Post a Comment