Ch02 The Economic Problem_ Scarcity and ChoiceWord

　　微观经济学第二章

　　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 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair

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　　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?

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　　微观经济学第二章

　　Three Basic Questions

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　　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.

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　　Specialization, Exchange and Comparative Advantage 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.

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　　Absolute Versus Comparative AdvantageOutput per Day of Work Food Clothing

　　Country A Country B

　　6 1

　　3 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. 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair

　　微观经济学第二章

　　Absolute Versus Comparative AdvantageOutput per Day of Work

　　FoodCountry A 6

　　Clothing3

　　Country B

　　1

　　2

　　The opportunity costs can be summarized as follows: For food: 1 unit of food costs country A 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 unit of food. 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair

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　　Absolute Versus Comparative AdvantageOutput per Day of Work

　　FoodCountry A 6

　　Clothing3

　　Country B

　　1

　　2

　　Conclusion: Country A will specialize in producing food, and

　　country B will specialize in the production of clothing.

　　Specialization also works to develop skills and raise producti

　　vity. 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair

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　　Weighing Present and Expected Future Costs and Benefits Investment is the process of using resources to produce new capital. Capital is the accumulation of previous investment. Because resources are scarce, the opportunity cost of every investment in capital is forgone present consumption.

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　　Capital Goods and Consumer Goods Consumer goods are goods produced for present consumption. Capital goods are goods used to produce other goods or services over time.

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　　The Production Possibility Frontier The production possibility frontier (ppf) is a graph that shows all of the combinations of goods and services that can be produced if all of society’s resources are used efficiently.

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　　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).

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　　The Production Possibility Frontier Points inside of the curve are inefficient. At point H, resources are either unemployed, or are used inefficiently.

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　　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.

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　　The Production Possibility Frontier Point C is one of the possible combinations of goods produced when resources are fully and efficiently employed.

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　　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.

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　　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.

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　　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.

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　　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.Karl Case, Ray Fair

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　　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.

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　　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 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair

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　　The Economic Problem 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. 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair

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　　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.

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　　Laissez-Faire Economies: The Free Market 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.

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