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Unit One: Basics

Unit One: Basics. Topic: Production. Learning Targets. The student will identify the four factors of production, who owns them and what they are used to produce.

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Unit One: Basics

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  1. Unit One: Basics Topic: Production

  2. Learning Targets • The student will identify the four factors of production, who owns them and what they are used to produce. • The student will understand what it means when an economy is at full employment, and can explain how the two types of efficiency create full employment. • The student will draw and evaluate the significance and implications of various points on a production possibilities curve. • The student will understand the law of increasing opportunity costs to the extent that the student can analyze how it influences the shape of the production possibilities curve. • I will successfully complete an AP-style FRQ over this topic, which will involve graphing, explanation and analysis of a scenario.

  3. Factors of Production • Resources (factors of production): • Capital goods • Land • Labor (entrepreneurship) • NOTE: MONEY IS NOT A RESOURCE! • McDonald’s examples

  4. Ownership/payments • Households own the factors of production. • Payments: • Capital goods = interest • Land = rent • Labor = wages (profits for the entrepreneur)

  5. What is Produced • Goods and services: • Capital • Consumer • Public • Private • Infrastructure (systems that help the economy run smoothly)

  6. Employment and Efficiency • FULL EMPLOYMENT – the best use of all available resources. • EFFICIENCY – full employment used in the least-cost way to produce the best mix of goods/services wanted by society. • ALLOCATIVE – best mix of g/s wanted by society. • PRODUCTIVE – least-cost way of producing. • Both ALLOCATIVE and PRODUCTIVE efficiency must be realized to have full efficiency.

  7. Remember… • Micro: Cost-benefit analysis…in order for allocative efficiency to exist, MC=MB. • Production possibilities curve assumptions: • Full employment and productive efficiency on the curve • Fixed resources and technology • Only two goods can be produced

  8. Production Possibilities Curve/Frontier (PPC/PPF) • Points on the curve represent productive efficiency and full employment. • Points inside the curve represent inefficiency and unemployment. • Points outside of the curve represent currently unattainable levels of production or areas of possible future growth. A The curve can shift outward (to the right) with new or better resources, technology or international trade. It can shift inward if resources are actually lost. Capital goods D C B Consumer goods

  9. Opportunity Costs • (Law of) increasing opportunity costs – as you produce additional units of one good, you must sacrifice greater units of the other good (because resources are not completely adaptable to other uses); creates a PPC that is bowed-out from the origin. • Constant opportunity costs – as you produce additional units of one good, the amount of the other good you give up remains the same; creates a straight line downward-sloping PPC.

  10. Economic Growth/Decline • Supply factors • Quality and quantity of natural resources • Quality and quantity of human resources • Changes in capital stock • Technology • Demand factor • Efficiency factor (economic efficiency and full employment) • Is there a relationship among these? Explain. • What will happen in terms of production possibilities if there is economic growth? Economic decline?

  11. Short-run vs. Long-run • Short-run • Cannot change amount of resources • “Points” on the model • Long-run • Can change the amount of resources • Economic growth/decline • Shift of the curve

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