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CHS ECONOMICS

CHS ECONOMICS . CHAPTER 1. Four Factors of Productions. 1. Land Anything that is a “gift of nature” i.e. whale 2. Labor The physical and mental talents that go into producing a good or service 3. Capital All of the manufactured items that aid in the production of a good

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CHS ECONOMICS

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  1. CHS ECONOMICS CHAPTER 1

  2. Four Factors of Productions • 1. Land • Anything that is a “gift of nature” i.e. whale • 2. Labor • The physical and mental talents that go into producing a good or service • 3. Capital • All of the manufactured items that aid in the production of a good • 4. Entrepreneurial Ability • Innovator that combines the other 3 FOP’s • Risk bearer – has no guarantee for profit • Makes all of the strategic business decisions

  3. Production Possibilities Model • Macroeconomic model of all of the alternatives and choices society faces in allocating resources (book page #11)

  4. Production Possibilities Model • Assumptions we will make • 1. Full employment • Economy is employing or using all available resources i.e. No leftovers • 2. Fixed Resources • Quantity and Quality of the Factors of Production are fixed • 3. Fixed Technology • The state of technology is constant • 4. Two Goods • Only making Pizzas (consumer good) and Industrial Robots (capital good)

  5. Production Possibilities Table • Lists the different combinations of products that can be produced with a specific set of resources assuming full employment (book page #11) • You can choose to make either product • But there will ALWAYS be a cost • You will always be sacrificing either short-term goals or long-term goals (hence a trade-off)

  6. Production Possibilities Table • Let’s think about it: • If you would quit school today you could get a job and be making money for the rest of the school year and make more money than the students who stayed in school. • BUT • If you stay in school and forgo the short-term money, you will make much more money in the future

  7. Production Possibilities Curve • Some Details • Otherwise more fondly known as the PPC • It depicts what can be produced using fully-employed resources (book page #12) • Each point on the curve represents the maximum output of the two products

  8. Production Possibilities Curve • More fun facts • The curve is a constraint because it shows the limit of attainable outputs (Similar to a budget line) • Points on the curve are: • Attainable as long as the economy uses all of its resources i.e. full employment • Points inside the curve are: • Attainable, but are less than ideal and do not reflect full-employment i.e. under employment • Points beyond the curve are: • Unattainable, because there are not enough resources

  9. Production Possibilities Curve • The Pregnancy Analogy: • When the baby is inside. It is attainable, but under-developed • When the baby is born. It is attainable, and fully grown using all of the resources • A baby could not be bigger than the mother’s body. Therefore it is unattainable and impossible unless the mother was bigger, but if it was possible it would be a really big baby.

  10. Law of Increasing Opportunity Cost • Think of this: • You are producing apples and want to produce more • Think about the factors of Production • What do you need to produce the apples?

  11. Law of Increasing Opportunity Cost • Let’s take it a bit further: • Is it possible to produce apples in the desert?

  12. Law of Increasing Opportunity Cost • So: • The LOIC states that when considering the production of a particular good • The opportunity cost for each additional item being made increases • Why? • Resources are not always adaptable to a making a good

  13. Optimal Allocation • Where MB=Marginal Benefit, equals Marginal Cost (book page # 13 & 14) • Remember society should only produce when the benefits exceed or equal the cost (its Common Sense)

  14. Unemployment • There are always periods and dips where the economy of a country is not at full employment • If we take away the assumption of full employment • We can be at any point within the PPC • To regain full employment we must move from that point to a point on the PPC

  15. A Growing Economy • By dropping the assumptions that the QTY and Quality of resources and technology are fixed • We can have the PPC shift and the potential maximum output of the economy will change • Advances in or new technology, resources, or use of resources will shift the curve outward • Economic Growth occurs (A larger total output)

  16. Economic Growth • Is the result of: • Increases in supplies or resources • Improvements in resource quality • Technological advances • Can allow for: • Increases in both consumer and capital goods instead of one or the other

  17. Present Choices and Future Possibilities • On the PPC • One axes of the graph is “goods for the present” • The other is “goods for the future” • You trade-off “present” for “future” • Neither is wrong • It depends on the economy and what they want • Their UTILITY

  18. International Trade • The PPC only concerns your economy • But if you trade with another economy you might be able to do more • Because of Specialization

  19. International Trade • Think about this: • Country A • Specializes in producing computers • Country B • Specializes in producing apples • They can trade with one another and limit their marginal cost and increase their marginal benefit

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