Production Possibilities Opportunity Cost and Economic Growth Economics

What will I learn in this chapter? Having learned that scarcity forces choices, here you will study the choices people make in more detail

What will I learn to solve in this chapter? • Why do so few rock stars and movie stars go to college? • Why would you spend an extra hour reading this text rather than going to a movie? • Why are investment and economic growth important?

What are three fundamental economic questions? What to produce? How to produce? For whom to produce?

What are two key concepts in this chapter? Opportunity costs Marginal analysis

What is opportunity cost? The best alternative sacrificed for a chosen alternative

What opportunity cost am I experiencing now? The most money that you could be making if you were somewhere else instead of studying these slides

Can opportunity cost be something other than money? Yes, that most desired activity that you are presently giving up is considered an opportunity cost

Opportunity Cost Choice Scarcity

What is marginal analysis? An examination of the effects of additions to or subtractions from a current situation

What is an example of marginal analysis? When your benefit of studying these slides exceeds the opportunity cost, you will spend time studying these slides

What is a production possibilities curve? A curve that shows the maximum combinations of two outputs that an economy can produce, given its available resources and technology

What is technology? The body of knowledge and skills applied to how goods are produced

What assumptions can I make about the productions possibilities model? Fixed resources Fully employed resources Technology unchanged

What conclusion can I make about scarcity? Scarcity limits an economy to points on or below its production possibilities curve

What are efficient points? Because all the points along the curve are maximum output levels with given resources and technology, they are called efficient points

What happens when we move between two efficient points? A movement between any two efficient points means that more of one product is produced only by producing less of the other

Output of military goods Production Possibilities Curve A Z B Al l po in ts U Inefficient point Unattainable point on C cu rv e ar e ef fic ie nt D Output of consumer goods

What is the law of increasing opportunity costs? The principle that the opportunity cost increases as production of one output expands

Output of military goods The Law of Increasing Opportunity Cost A Al B lp oi nt s on C cu rv e ar e ef fic ie nt D Output of consumer goods

What is economic growth? The ability of an economy to produce greater levels of output, an outward shift of its production possibilities curve

What makes possible economic growth? Research and development of new technologies Increase production in excess of worn out capital

Economic growth Technological advance

Technological Advance Computers B A Pizzas C

What happens when a country does not invest in new technology? Everything else being equal, the country will not grow

What is investment? The accumulation of capital, such as factories, machines, and inventories, that is used to produce goods and services

What is the opportunity cost of investment? The consumer goods that could have been purchased with the money spent for plants and other capital

What does an increase in investments make possible in the future? Economic growth and more goods and services

What conclusion can I make about investments? A nation can accelerate growth by increasing production of capital goods in excess of the capital being worn out

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