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Production Possibilities/economic systems

Terms in this set (56)

Production Possibilities
the various combinations of final goods and services that could be produced in a given time period with all available resources and technology.
production possibilities curve (PPC)
) is the boundary between those combinations of goods and services that can be produced and those that cannot.
PPC
Shows different combinations of 2 products which can be produced with a specific set of resources and with full employment and productive efficiency
PPC
trucks vs. tanks; pizza vs. CDs
Scarce resources
Scarce resources: there is a limit to the amount we can produce in a given time with available resources and technology.
This limitation positions the PPC.
Opportunity costs
we can obtain additional quantities of one of the goods only by reducing production of another good.
inefficient production
Points lying inside the curve are attainable but not as desirable as points on the curve - more output could be produced with available resources
efficient production
Each point on the curve represents some maximum output of the 2 products - - - shows the limit of attainable capacity
Points inside the curve
imply that the economy could have more of both products if it achieved full employment and productive efficiency (where unemployment and productive efficiency occur)
Points outside the curve
represent greater output than at any point on the curve, but are unattainable with current supplies of resources and technology (unless trade makes up the gap)
Points on the curve
represent maximum effient use of our production possibilities
Curve is concave
reflecting increasing opportunity costs
PPC Outward bow
as the quantity produced of each good increases, so does its opportunity cost.
Law of Increasing Opportunity Cost
More of a product which is produced, the greater is its opportunity cost
as an economy moves along the production possibilities curve in the direction of producing more of a particular good, opportunity costs of additional units of that good will increase
PPC right shift
economy grows because of its ability to produce a larger total output
Economic growth
an increase in output; an expansion of production possibilities..caused by increasing the resources available or by producing better technology.
Economic growth
means the production possibilities curve will shift out.
Efficiency
maximum output of a good from the resources used in production...
Every point on the production possibilities curve is a point of efficiency.
Point of efficiency
Points on the curve
Allocative efficiency
When we cannot produce more of any one good without giving up some other good that we value more highly, we have achieved allocative efficiency, and we are producing at the point on the PPF that we prefer above all other points. when resources are divided among firms and industries to obtain production of the products most wanted by consumers

Occurs when MB = MC
productive efficiency
When we cannot produce more of any one good without giving up some other good, we have achieved productive efficiency, and we are producing at a point on the PPF.
production of goods in the least costly way
economy can not produce more of 1 good without producing less of some other good
Point of allocative efficiency
The point of allocative efficiency is the point on the PPF at which marginal benefit equals marginal cost
marginal cost of a good or service
service is the opportunity cost of producing one more unit of it.
Moving along the PPC
As we move along the PPC in part a (shown here) the opportunity cost and the marginal cost of pizza increases.
Preferences
a description of a person's likes and dislikes.To describe preferences, economists use the concepts of marginal benefit and the marginal benefit curve.
marginal benefit of a good or service
the benefit received from consuming one more unit of it
We measure marginal benefit by the amount that a person is willing to pay for an additional unit of a good or service.
marginal benefit curve
shows the relationship between the marginal benefit of a good and the quantity of that good consumed.
the principle of decreasing marginal benefit.
It is a general principle that the more we have of any good or service, the smaller is its marginal benefit and the less we are willing to pay for an additional unit of it.
Downward slope on a graph
Too far to the right on the ppc
marginal cost exceeds marginal benefit.
Too far to the left on the ppc
, marginal benefit exceeds marginal cost.
Economic System
Set of rules that defines how an economy's resources are to be owned and how decisions about their use are to be made
Overall method of doing business in a country
Land
Labor
Capital
Entrepreneurship
The resources that are used to produce goods and services are:
Land
non-human resources fixed in supply (gifts of nature)
includes real estate and natural resources within it
Earns rent
Labor
human effort put to service satisfying human wants (both physical and mental)
no coercion involved
work time and effort that people devote to producing goods and services
Earns wages + salaries
Capital
The quality of labor depends on human capital, which is the knowledge and skill that people obtain from education, on-the-job training, and work experience.
Includes equipment, tools, structures, machinery, and skills created to help produce goods and services
earns interest and dividends
Entrepreneurial Ability
Takes the initiative, makes policy decisions, source of innovation, the risk bearer
earns profit
Rent
price paid for use of land
wages and salaries
price paid for use of labor
Interest and dividends
cost of financing capital goods
Profits
price of successful management
Factors of production
Land, labor, capital, entrep ability
Costs of production
Rent, wages and salaries, interests and dividends, profits
Types of economic systems
Pure capitalism, using the market mechanism
Government directed systems
A mixture of both
Pure capitalism
market system
private ownership of resources and use of system of markets and prices to coordinate economic activity
private owners have power to make decisions about their use
each individual acts in his/her own self interest
The market mechanism
The use of market prices and sales to signal desired outputs and resource allocations.
In fact, we get there by the interaction of millions of decisions made by buyers, sellers, and producers in their own self-interest (i.e., to make themselves better off).
Command Economy
public ownership of virtually all property resources and economic decision-making through central economic planningAt its extreme, government could dictate answers to all basic questions in a command economy.
Mixed system
Combination of the two - private markets and government involvement
The market is highly efficient in production of wanted goods and services.
Government involvement
acts as a maintainer of balance in the economy.
Makes sure the market does not go to excesses either in underproduction or overproduction.
Regulates production to ensure that goods and services are safe.
Acts to redress excessive inequalities.Supplies government services (national defense, police and court system, roads, schools, fire protection, social insurance, etc.).
Provides income support (pensions, welfare, medical insurance, etc.).
Regulates markets.
Traditional economy
production methods, exchange of goods and distribution of income are all sanctioned by custom or tradition
What mix is best?
Few governments have relied exclusively on either pure market or pure government to manage the economy.
Public opinion around the world indicates that the free-market economic system is best.
market failure
If the market does not produce the mix of goods that society desires. This provides an opening for the government to step in. If government can move us closer to the mix society desires, the intervention is successful.
Government failure
However, government can do the opposite, or impose such high costs that the market simply ceases to produce. This is government failure
Market system
Characteristics
private property
freedom of enterprise and choice
self-interest
competition
markets and prices coordinate economic activity
limited government
Private property
People can obtain, control, use and dispose of the property resources they own
sustained by the right to bequeath and inherit
government can limit use and control
intellectual property also
facilitate exchange
Self Interest
Primary, driving force in market system
each economic unit attempts to do what is best for itself
gives direction and consistency to situation instead of chaos
profit motivation
Competetion
Controlling mechanism of system
large number of sellers means that no single producer or seller can afford price or market supply
large number of buyers and sellers acting independently
easy entry and exit for producers
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