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Chapter 2
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Learning Objectives
2-2
Economics Defined
2-3
The Central Fact of Economics: SCARCITY
2-4
Four Economic Resources
2-5
Land Earns Rents
2-6
Labor Earns Wages.
• Labor:
o is work and time for which one is paid.
2-7
Capital Earns Interest.
• Capital:
o “human-made” goods used to produce other goods or services.
o includes office buildings, stores, and factories (physical plant),
equipment, and software.
o This is a different use of the term capital than when it means the
money a business uses to buy plant and equipment.
2-8
Entrepreneur Ability Earns Profits.
• The entrepreneur:
o sets up a business.
o assembles the needed resources.
o risks his/her own (or borrowed) money.
o is central to the American economy.
2-9
Questions for Thought and Discussion
2-10
Our Economic Problem Revisited
2-11
Opportunity Cost: A Fundamental Concept in
Economics
2-12
Choosing the Highest Valued Alternative
• Whichever option is chosen, you will miss the value of the other
options.
o If you go to the movie with friends, the direct cost is the movie ticket and
any transportation costs.
o The opportunity cost is the value of the alternatives use of your time (for
example, the benefit of the improvement in your grade from studying).
o Opportunity cost may or may not have a dollar value. But you implicitly
place a value when you make a decision.
2-13
You inherit $40,000.
Two choices: Buy your dream car or go to college.
2-14
Businesses and Government Face Also
Opportunity Costs.
2-15
Questions for Thought and Discussion
2-16
Full Employment and Full Production
2-17
Underemployment of Resources
2-18
Employment Discrimination Causes
Underemployment of Society’s Resources.
2-19
The Production Possibilities Curve
2-20
The Production Possibilities Curve
• Points A, B, C, D, E, and F are
efficient with full employment
and full production.
2-21
Production Possibilities Curve
Hypothetical Production
Schedule
Point Units of Units of
Butter Guns
A 15 0
B 14 1
C 12 2
D 9 3
This Production Possibilities Curve
shows the range of possible
combinations of guns and butter
E 5 4 extending from 15 units of butter
and no guns at point A to 5 units of
guns and no butter at point F
F 0 5
2-22
Production Possibilities Curve
Hypothetical Production
Schedule
Point Units of Units of
Butter Guns
A 15 0 Had to give up 1
unit of butter
B 14 1
C 12 2
2-24
Questions for Thought and Discussion
2-25
Economic Growth
2-26
Economic Growth Illustrated
PPC
PPC after
economic growth
PPC after
more growth
2-27
Investing in Future Growth
• Note that investment in capital equipment today can lead to economic growth in the future.
• Choosing Point B in Year 1 gives us greater production possibilities in the future than
choosing Point A.
2-28
Questions for Thought and Discussion
2-29