This chapter continues building on the foundation laid in the preceding chapter.
Having learned that scarcity forces choices. Here you will study the choices people make in more detail. This chapter begins by examining the three basic choices. Watch how and for home to Purdu will discover that the production possibilities model teachers many of the most important concepts in economics, including scarcity, the law of increase in opportunity costs, efficiency, [inaudible] investment, an economic growth. The three basic questions are what? How and for home to produce the problem of scarcity restricts our ao produce everything we want. So the choice to produce more of one good, it requires producing less of another good after deciding which goods to make. The second question is how to produce the chosen goods once the what and how questions are resolved. The third question is for home should we produce who actually receives the goods and services produced? This chapter presents some tools to answer these questions. The concepts of opportunity costs and margin analysis. Well, help us ask the questions of what pow and for whom to produce opportunity costs is the best alternative. Sacrificed for a chosen alternative stated differently.
It's the cost of not choosing the next fast alternative. This principle States at some highly valued opportunity, it must be for gone in all economic decisions. The actual good or use of time given up for that chosen good or use of time measures the opportunity cost. Each time you make a decision you incur an opportunity cost. The opportunity costs could be financial or nonfinancial for example. Where could you be right now earning the most money possible? The money you could be making has to be realistic given your age, work experience, education, skill level, and the job opportunities where you live. Realistically, what is that one thing you would rather be doing now? This would be a non financial opportunity cost because you live in a world of scarcity, you were forced to make choices. Each time you make a choice, you incur an opportunity cost.
The term margin means the last unit or the last increment. For example, marginal benefit is a benefit received from a decision you make. Marginal cost is how much that decision cost you marginal. Now, Asus examines this decision making process. The rational decision maker decides on an option only if the margin of benefit exceeds the marginal cost. You will make a decision to do something when you're marginal benefit of doing that thing is greater then the opportunity cost of that activity. The production possibilities curve shows the maximum combinations of two outputs that an economy can produce in a given period of time with its available resources and technology. Three basic assumptions underlie the production possibilities curve model resources are fixed, resources are fully employed and technology remains on changed. This slide shows a picture of the production possibilities curve. Each point on the curve shows the maximum combinations of military goods and consumer goods that can be produced given the present resources, [inaudible] and state of technology.
Each point inside the curve illustrates combinations where the economy is not operating at its potential. All points beyond the curve are not attainable at this time. The production possibilities curve consists of all efficient output combinations in which an economy can produce more of one good only by producing less of the other good. The production possibilities curve illustrates that we live in a world of scarce resources. Yet people have unlimited wants and needs, so how can we best meet people's needs in this world of scarcity? Once we are operating on a production possibilities curve, the only way to have more of everything just to push the curve outward. By growing the economy, the of increase increasing opportunity costs States that the opportunity costs [inaudible] increases as production of one output expand old in the stock of resources and technology constant. The law of increasing opportunity costs causes the production possibilities curve to display a bowed out shape.
Economic growth is the ability of an economy to produce greater levels of output represented by an hour shift of its production possibilities curve. When we grow in, it's possible to have more of everything and thus the standard of living for the average income person can increase. A way to grow the economy is to gain additional resources. Any increase in resources will shift the production possibilities curve outward on. Another way to achieve economic growth is through research and development. Technological change makes it possible to shift the production possibilities curve outward by producing more. Does the same resource base.
One sort of technological change is invention, light bulbs, transistors, computers, satellites, and the internet are all examples of technological advances. Technological change also comes from innovations. Innovation's involved finding new and better ways to do something. Both inventions and innovations expand the production possibilities curve. This graph shows how advancements in technology can shift the production possibilities curve outward. This outward shift makes it possible for us to have more of both capital goods and consumer goods. If we do not grow , then we begin to shrink because things deteriorate are roads, buildings, cars, trucks and communication system all wear out over time. Therefore, if we do not continually replace these things, the production possibilities curve begins to move to the left. A leper movement means that we are relegated with less of everything and their standard of living for the average income person declines. This graph shows what can happen if we do not grow as production possibilities.
Curve moves to the left. We are relegated with having less of both consumer goods and capital goods. Investment is the accumulation of capital such as factories, machines, and inventories, which are used to produce goods and services. Newly built factories and machines in the present provide in economy with the capacity to expand its production options in the future in order to have more consumer goods tomorrow. It is necessary for us to devote more of our resources today, investing in new plants and equipment by producing more capital goods today we can have more consumer goods tomorrow. The opportunity cost of devoting more of our resources today to capital goods are the consumer goods we have to give up today. If we simply replaced our worn out capital with capital goods, the same technology, we would not grow in order to grow to have more this year than we had last year. We have to replace our present capital with new and better capital. The more we invest in new and better capital this year, the more we will grow. Next year
this ends chapter two. Hopefully you'll gain a better understanding of the economic problem that is. We live in a world of scarce resources, yet people have unlimited wants and needs. So how do we best satisfy these needs in this world of scarcity? Our free enterprise system enables us to answer the questions of what, how, and for whom to produce the concept of opportunity costs and marginal. Now, Asus, along with an understanding of grow, we'll help you understand the world in which we live. [inaudible].