Chapter 2

Resource Utilization

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 Learning Objectives
 In this chapter you’ll learn:
1. The definition of economics.
2. The central fact of economics.
3. The four economic resources.
4. The concepts of full employment, full production, and
underemployment.
5. The concept of the production possibilities curve.
6. Productive efficiency.
7. What enables an economy to grow.
8. The law of increasing costs.
9. The concept of opportunity cost.

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 Economics Defined

 Economics is the efficient allocation of the scarce

means of production toward the satisfaction of
human wants.
• The means of production are limited.
• Human wants are unlimited.

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 The Central Fact of Economics: SCARCITY
 Scarcity
• Resources are the things society uses to produce goods
and services.
• These resources are scarce (limited).

 The economic problem

• There are never enough resources to produce all of the
goods and services that people want.

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 Four Economic Resources

 Land

 Labor

 Capital

 Entrepreneurial ability

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 Land

 Land (a broader meaning than our normal

understanding of the word).
• Includes natural resources: timber, oil, coal, iron ore, soil,
water, as well as the ground in which these resources are
found.
• Is used for the extraction of minerals and farming.
• Provides the site for factories, office buildings, shopping
centers, homes, etc.
• Owners of land receive “rent.”

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 Labor

 Labor

• The work and time for which one is paid is what economists
call “labor”

• Money received for one’s labor is called wages and/or

salaries

• About two-thirds of the total resource cost is the cost of labor

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 Capital

 Capital
• Man-made goods used to produce other goods or services
is what economists call “capital.”
• Examples are office buildings, stores, and factories.
• Consists of mainly plant and equipment.
• The money owners of “capital” receive is called “interest.”
• Capital is the MOST important of the four economic
resources.

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 Entrepreneurial Ability

 The entrepreneur
• Sets up a business.
• Assembles the needed resources.
• Risks his/her own (or borrowed) money.
• Makes a “profit” or incurs a “loss.”
• Is central to the American economy.
 25 million businesses are virtually all entrepreneurs.
• The vast majority work for themselves or have 1 or 2
employees.

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 Our Economic Problem Revisited

 Limited resources versus unlimited wants.

 There are NOT enough resources to produce

everything that everyone wants.

 Therefore, CHOICES must BE MADE!

 Every choice has an “opportunity cost” associated

with it!

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 Questions for Thought and Discussion

 Why are the means of production scarce?

 Why is capital the most important factor of

production?

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 Opportunity Cost: An Important
Fundamental Concept in Economics
 Because we cannot have everything we want, we
must make choices.

 The thing we give up (our second-best choice) is

called the opportunity cost of our choice.
• This is the foregone value of the next best alternative.

 In the economic world, “both” is not an admissible

answer to a choice of “which one.”

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 Highest Valued Alternative

 Options:
• Watch TV.
• Talk on the telephone.
• Go on a date.
• Study economics.
• Opportunity cost is the highest valued alternative that could
have been chosen (i.e., study economics).
• Opportunity cost may or may not have a dollar value.

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 Inherit $40,000
Two choices: Buy a car or go to college

 Bought the car (paid  Can’t go to college

$40,000)

College graduate (lifetime earnings)

$1,300,000
High School graduate (lifetime earnings) $800,000

Opportunity Cost $500,000

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 California 1967–1997

 Prisons  Colleges
• Added 21 additional • Added 1 additional college
prisons

The Opportunity Cost of building more prisons is

building fewer colleges

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 Questions for Thought and Discussion

 Do Bill Gates or other wealthy persons face scarcity?

 Why is capital such an important resource?

 What is the opportunity cost of America’s

involvement in Iraq?

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 Productive Efficiency

 Is attained when the maximum possible output of

one good is produced, given the output of other
goods.
• Productive efficiency occurs only when we are operating on
the production possibilities curve.
• Productivity efficiency means that the output of one good
cannot be attained with out reducing the output of some
other good.

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 Full Employment and Full Production
 Full employment = 5% unemployment rate

 From 1971–1996 the unemployment rate was above

5% (in recent years, this has lingered below 5%).

 Full production— 85–90% plant utilization rate.

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 Underemployment of Resources
 An unemployment rate greater than 5%

 A capacity utilization rate less than 85%

 Discrimination
• A phenomenon that has diminished but has not been
eliminated entirely.
• Probably keeps our output 10–15% below what it could
be.
• If there were truly an efficient allocation of resources.

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 The Production Possibilities Curve

 The Production Possibilities Curve represents our

economy at

• Full employment.

• Full production.

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 The Landscape of the Production Possibility
Frontier

Production Possibilities
Only clothing Curve ( PPC )
 Points S, A, B, C, and T are is produced
Output
efficient with full employment of Butter
and full plant capacity. S All output
A combinations
on the frontier
curve are
 Point D is producing at below efficient.
B
efficiency since either plants are D
being under utilized or the
workforce is underemployed.
- Inefficiency - C
Only food
is produced
 Any point above the production
T
possibility curve is not Output
of Guns
achievable.

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 Production Possibilities Curve

Hypothetical Production
Schedule
16
A

Point Units of Units of 14

B

Butter Guns C
12

A 15 0 10
D

B 14 1 6
E

2
C 12 2 0
F
1 2 3 4 5 6
Units of guns

D 9 3
This Production Possibilities
Curve shows the range of
E 5 4 possible combinations of
guns and butter extending
from 15 units of butter and no
F 0 5 guns at point A to 5 units of
guns and no butter at point F

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 Production Possibilities Curve (Continued)

Hypothetical Production
Schedule 16
A
B Had to give up 1
14
Units of Units of unit of butter
Point C
Butter Guns 12

10
D
To gain 1 unit
A 15 0 8 of Guns
6
E
B 14 1 4

C 12 2 0
1 2 3 4 5
F
6
Units of guns

D 9 3 • When you are on the curve,

to get more of one thing you
E 5 4 have to give up some of the
other thing.
• The opportunity cost of
F 0 5 gaining 1 unit of guns was 1
unit of butter
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 Production Possibilities Curve (Continued)

Hypothetical Production 16
A

Schedule 14
B

C
12
Point Units of Units of
Butter Guns 10
D

A 15 0 6
E

B 14 1 2

F
0
1 2 3 4 5 6
C 12 2 Units of guns

• When you are on the curve,

D 9 3 to get more of one thing you
have to give up some of the
other thing.
E 5 4 • In this particular instance,
the opportunity cost of gaining
F 0 5 1 unit of guns was 2 units of
butter.
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 Law of Increasing Costs
 As we shift from butter to guns,
we have to give up increasing
units of butter for each additional
unit of guns.
16
A
B
 This is known as the “law of 14

increasing cost.” As the output of 12

C

one good expands, the

opportunity cost of producing 10
D
additional units of this good 8
increases.
6
E

 You give up fewer units of butter 4

to get 1 unit of guns up top. 2

F
0
1 2 3 4 5 6
 You give up more units of butter Units of guns
to get 1 unit of guns at the bottom

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 Economic Growth

 Best available technology

 Expansion of labor
• More or better trained labor

 Expansion of capital
• More or improved plant and equipment

 Investment means growth

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 Investment, Consumption, and the Production
Possibilities Curve

 We can choose between

consumption and investment.
Investment
goods PPC 2015 with B
 Investment increases future PPC 2015 with A
production possibilities. PPC 2005

 Greater investment means

greater future production
possibilities. B
IB
A
IA
 Point B gives us greater
production possibilities than
Point A.
CB CA Consumption
goods

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 Questions for Thought and Discussion

 Given limited resources, is growth always good?

• Why do most mainstream economists embrace growth?

 What is the relationship between investment,

consumption, and growth?
• Can you illustrate this by drawing a graph using production
possibility curves?

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