Class 2 Chapter 1

Technology and Opportunity Cost

• Technology: Refers to the method of production, detailing how resources are combined to produce goods and services.
• Opportunity Cost: The value of the next-best alternative that is given up when making a particular choice.

Scarcity and Choice

• Scarcity necessitates choice for society, government, and individuals.
• Every choice involves an opportunity cost, which is the benefit sacrificed from the next best alternative.

Consumer and Capital Goods

• Consumer Goods and Services: Products used by consumers to satisfy wants and needs (e.g., pizza).
• Capital Goods: Factories, tools, and equipment used to produce other goods for sale (e.g., machinery).
• Increasing the production of capital goods leads to economic growth but at the opportunity cost of fewer consumer goods.
• Consumer goods are bought only by consumers, while capital goods are bought by firms or governments.

Efficiency

• Efficiency: Getting the most for the least.
• Productive Efficiency: Producing an output at the lowest possible average cost.
• Allocative Efficiency: Producing the combination of outputs that best satisfies consumers’ demands.

Five Allocative Methods

• First come, first served
• Lottery
• Sellers’ preference
• Government decree
• The market

The Power of Trade

• Voluntary trade benefits all parties involved.
• Increased trade leads to greater benefits for individuals and nations.

Benefits of Trade Example

• Scenario: Two cities, Haida and Bear River, produce salmon and nets.
• Haida: Maximum potential output is 20 salmon OR 10 nets.
• Bear River: Maximum potential output is 10 salmon OR 20 nets.
• Without Trade: If each city produces half of each item:
  • Haida: 10 salmon AND 5 nets
  • Bear River: 5 salmon AND 10 nets
  • Total Output: 15 salmon AND 15 nets
• With Trade: Each city specializes in what it does best:
  • Haida: 20 salmon AND 0 nets
  • Bear River: 0 salmon AND 20 nets
  • Total Output: 20 salmon AND 20 nets
• Through specialization and trade, the two countries can achieve a gain of 5 salmon and 5 nets.

Three Fundamental Questions

• All economic societies must answer:
  1. What to produce (luxuries vs. necessities, capital vs. consumer goods)?
  2. How to produce (technology)?
  3. For whom (how should the goods or income be distributed)?

Four Types of Economies

• Co-operative Economies (foraging societies)
• Command Economies (totalitarian states)
• Customary Economies (traditional, religious societies)
• Competitive Economies (market economies)
• Mixed Economies (combination of all four)

Production Possibilities

• Production Possibilities Curve (PPC): A graphical representation of the various combinations of maximum output that can be produced from available resources and technology.
• Assumptions:
  • Full employment
  • Use of the best technology available
  • Productive efficiency

Production Possibilities Table Example

• Table showing production of cars and tonnes of wheat (millions of units) for various output combinations.
  • Combination A: 0 cars, 100 wheat
  • Combination B: 50 cars, 95 wheat
  • Combination C: 90 cars, 85 wheat
  • Combination D: 120 cars, 65 wheat
  • Combination E: 140 cars, 40 wheat
  • Combination F: 150 cars, 0 wheat

Interpreting the PPC

• Scarcity: Represented by points outside the curve (unattainable).
• Choice: Represented by points on the curve (efficient) and points within the curve (inefficient).
• Opportunity Cost: Represented by the downward slope of the curve.

The Law of Increasing Costs

• As an economy’s total production level of any particular item increases, the per-unit cost (opportunity cost) of producing additional units of that item will rise.

Implications

• Factors of production are not equally suitable for producing different products.
• As output increases, the per-unit costs of additional units increase.
• This law gives the production possibilities curve its bowed-out shape.

Example of Increasing Opportunity Costs

• As more cars are produced, an increasing amount of wheat must be given up.

PPC and Economic Growth

• Economic growth means the economy can produce more of everything.
• Illustrated by a shift of the PPC.

PPC and Technological Change

• Improvement in technology in one sector (e.g., car production) shifts the curve outward in that sector.
• The economy can now produce more of either good or more of both.
• Illustrated by a pivot of the PPC.

Chapter 1 Summary: Key Concepts

1. Economics is a relevant discipline in our society.
2. The scientific method is used in economics, divided into microeconomics and macroeconomics.
3. Scarcity, choice, and opportunity cost are central to economics.
4. Greater trade results in more productive economies.
5. What to produce, how to produce it, and for whom are fundamental economic questions.
6. Economic societies may be organized through co-operation, command, custom, and competition.
7. The production possibilities model illustrates choice, opportunity cost, efficiency, and unemployment.