| Core Issues in Economics
|Factors of Production:
- Factors of Production
- resource inputs used to produce goods and
(e.g., land, labor, capital, entrepreneurship)
- There are four basic factors of production.
- refers not just to the ground but to all natural
such as crude oil, water, air and minerals.
- refers to the skills and abilities to produce goods
services. Hence, both the quantity and the quality of human
are included in the “labor” factor.
- final goods produced for use in the production of
- the assembling of resources to produce new or improved
|Limits to Output:
- No matter how an economy is organized there is a limit to
fast it can grow.
- The most evident limit is the amount of resources
for producing goods and services.
|Guns versus Butter:
- One of the persistent choices about resource use entails
- The U.S. government spends more than $250 billion a year
- From an economic view, those defense expenditures also
represent an enormous claim on scarce resources.
- The 1.5 million men and women serving in the armed forces
aren’t available to build schools, design clothes, or teach economics.
- The land, labor, capital, and entrepreneurship devoted to
producing military hardware are not available for producing civilian
goods, thus the “guns vs. butter” dilemma.
- Since the end of the Cold War, the United States has
to produce more “Butter” (Civilian goods) and fewer “guns” resulting in
defense spending declining from a high of 6.4 percent of total output
1986 to only 3.3 percent in 1999.
- This freeing up of resources from the military sector is
referred to as the “peace dividend”.
- The most desired goods or services that are forgone in
to obtain something else.
- Everything we do involves an opportunity cost.
- The Production Possibilities Curve
- the alternative combinations of final goods and services
could be produced in a given
period with all available resources and technology.
- each point on the production possibilities curve depicts
alternative mix of output.
- the production possibilities curve illustrates two
- Scarce resources – there is a limit to the amount we
produce in a given time period with available resources and technology.
- Opportunity costs – We can obtain additional
of any desired good only by reducing the potential production of
- Increasing Opportunity Costs
- the shape of the production possibilities curve reflects
limitation on our choices.
- why do opportunity costs increase? because it is
difficult to move resources from one industry to another.
- the “law” of increasing opportunity cost says that we
give up ever-increasing quantities of other goods and services in order
to get more of a particular good.
- increasing opportunity costs aren’t a sign of
- efficiency means “getting the most from what you’ve got”
that is, using factors of production in the most productive way.
- maximum output of a good from the resources used in
- there’s no guarantee, of course, that we’ll always use
- a production possibilities curve shows potential output,
necessarily actual output.
- if we are inefficient, actual output will be less than
- Economic Growth
- an increase in output (real GDP); an expansion of
- all output combinations that lie outside the production
possibilities curve are unattainable with available resources and
- over time, population increases and we get more
Also, if we continue building factories and machinery, the stock of
capital will also increase.
- the quality of labor and capital can also increase if we
workers and pursue new technologies.
- all of these changes will increase potential output and
shift the production possibilities curve outward.
- with more resources or better technology, our production
|The Market Mechanism:
- The use of market prices and sales to signal desired
(or resource allocations).
- The essential feature of the market mechanism is the
- The market mechanism can also answer the HOW and FOR
- To maximize their profits, producers will seek to use
lowest-cost method of producing a good.
- A market distributes goods to the highest
Individuals who are willing and able to pay the most for a good tend to
get it in a pure market economy.
- Adam Smith said the “invisible hand” determines what gets
produce, how, and for whom.
- The laissez-faire (doctrine of “leave it alone”)
policy Adam Smith favored has always
had its share of critics.
- Karl Marx emphasized how
free markets tend to concentrate wealth and power in the hands of the
at the expense of the many.
Maynard Keynes seemed to offer a less drastic solution.
- As Marx saw it, unfettered markets permit the
(those who own the machinery and factories) to enrich themselves while
proletariat (the workers) toil long hours for subsistence wages.
- Marx argued that the government not only had to
but had to own all the means of production.
- The market, he conceded, was pretty efficient in
production and building better mousetraps.
- However, individual producers and workers had no control
the broader economy. He believed the cumulative actions of so
economic agents could easily tip the economy in the wrong direction.
- In Keynes’ view, government should play an active but no
all-inclusive role in managing the economy