Economics: Unit 1-Chapter 2: Factors of Production; Production Possibilities Graphs

Macroeconomics-Study of the major components of an economy (Inflation, GDP, unemployment, supply and demand)

Microeconomics-Study of how households and firms make decisions

Positive Economics-Tempting to describe the world as it is (Facts)
Normative Economics-Describes the world in how it should be; very prescriptive in nature (Opinion)


Wants-Desire's of citizens; much broader than needs
Needs-Basic requirements for survival

Scarcity-Most basic fundamental economic problem that all societies face

• Facing unlimited wants with limited resources

Shortage-A situation in which quantity demanded is greater than quantity supplied.

Goods-Tangible commadites (can be bought, sold, traded, and produced) 

• Consumer Goods-goods that are intended for final use by the consumer
• Capital Goods- items used in the creation of other goods such as factory machinery and trucks

Services-Work that is performed for someone else

Factors of Production (FoP):

1. Land (natural resources)
2. Labor
3. Capital
• Human Capital-The knowledge and skills a worker gains through education and experience.
• Physical Capital-Human made objects used to create other goods and services (tools, machinery, buildings)
4. Entrepreneurship 

Opportunity Cost-Most desirable alternative given up by making a decision (trade-of)

Production possibilities Graph (PPG)-shows alternative ways to use resources

                                    Curve (PPC)

                                  Frontier (PPF)

Productive Efficiency-Producing at the lowest cost, allocating resources efficiently, full employment or resources (any point on the curve)

Allocative Efficiency-Combination that is most desired by society (where to produce on the curve)

Law of Increasing Opportunity Cost-When resources are shifted from making one good or service to another, the cost of producing the second item increases.

• This occurs because not all resources are equally suited for the production of all goods and services.

4 Key assumptions of production possibilities:

1. Only 2 goods can be produces
2. Full employment of resources
3. Their are 4 fixed resources (land, labor, capital, entrepreneurship)
4. Fixed technology

Example of a PPG 

Graph Points

• Inside the Curve-attainable, but inefficient
• Result from war, famine unemployment, not using all available resources
• In the Curve-attainable and efficient
• Outside the Curve-Unattainable
• Attainable through advanced technology and economic growth