| Line 44: |
Line 44: |
| | "Production possibilities, or "Possibilities of production," means all the different combinations of goods a nation can produce. The United States can produce X cars and Y trucks, for example. Or it could produce more than X cars and fewer than Y trucks. We could graph the number of cars on the Y-axis and the number of trucks on the X-axis, and draw a “production possibility” curve through all the possible combinations. It would be downward sloping: more trucks means fewer cars, and vice-versa. The opportunity cost of producing more cars is the loss in production of trucks. In the production possibility curve for cars and boats shown in Figure A (below), the opportunity cost of moving from point A to point B is 100 cars. | | "Production possibilities, or "Possibilities of production," means all the different combinations of goods a nation can produce. The United States can produce X cars and Y trucks, for example. Or it could produce more than X cars and fewer than Y trucks. We could graph the number of cars on the Y-axis and the number of trucks on the X-axis, and draw a “production possibility” curve through all the possible combinations. It would be downward sloping: more trucks means fewer cars, and vice-versa. The opportunity cost of producing more cars is the loss in production of trucks. In the production possibility curve for cars and boats shown in Figure A (below), the opportunity cost of moving from point A to point B is 100 cars. |
| | | | |
| − | The shape of the production possibilities curve (often called the "production possibilities frontier") is dictated by the high opportunity cost of trying to convert a nation's factories from making one type of good to making another type. Imagine having a car factory and a truck factory, and then trying to convert the entire truck factory such that it makes only cars. At a fixed level of expense, the truck factory is not going to be able to make as many cars as the trucks it was designed to make. So converting the nation from, for example, a level of 500 cars and 500 trucks to as many cars as possible will probably not be able to reach a level of 1000 cars and zero trucks. Instead, it will probably top off at a number less than 1000, and hence the tapering of the production possibilities curve near the two axes. | + | The shape of the production possibilities curve (often called the "production possibilities frontier") is dictated by the high opportunity cost of trying to convert an entire nation's factories from making one type of good to making another type. Imagine having a car factory and a truck factory, and then trying to convert the entire truck factory such that it makes only cars. At a fixed level of expense, the truck factory is not going to be able to make as many cars as the trucks it was designed to make. So converting the nation from, for example, a level of 500 cars and 500 trucks to as many cars as possible will probably not be able to reach a level of 1000 cars and zero trucks. Instead, it will probably top off at a number less than 1000, and hence the tapering of the production possibilities curve near the two axes. |
| | | | |
| | If the overall number of workers or investment capital increased, then you could produce more of everything. The entire production possibilities graph (or “production possibilities frontier”) would shift upward and to the right. An improvement in technology would have the same effect. An increase in bureaucracy or administrative costs, however, would have the opposite effect, forcing a contraction in overall production. | | If the overall number of workers or investment capital increased, then you could produce more of everything. The entire production possibilities graph (or “production possibilities frontier”) would shift upward and to the right. An improvement in technology would have the same effect. An increase in bureaucracy or administrative costs, however, would have the opposite effect, forcing a contraction in overall production. |
| Line 73: |
Line 73: |
| | == The Law of Comparative Advantage == | | == The Law of Comparative Advantage == |
| | | | |
| − | There is an interesting concept in economics known as the Law of Comparative Advantage. The CLEP usually asks two questions about it. | + | There is an interesting concept in economics known as the Law of Comparative Advantage. The CLEP exam usually asks two questions about it. |
| | | | |
| | '''''The Law of Comparative Advantage states that if one nation can produce two goods more efficiently than another nation, then the first nation should devote all its resources to producing the good that it makes more efficiently, and let the other nation produce the second good, and then trade one for the other.''''' This Law can apply to individuals and firms as well as countries. | | '''''The Law of Comparative Advantage states that if one nation can produce two goods more efficiently than another nation, then the first nation should devote all its resources to producing the good that it makes more efficiently, and let the other nation produce the second good, and then trade one for the other.''''' This Law can apply to individuals and firms as well as countries. |
| Line 128: |
Line 128: |
| | Does that seem unfair? No one has to supply Wal-Mart goods at a low price. If a supplier does not want to do business with Wal-Mart, then it doesn’t have to. No one has to take a job there either! | | Does that seem unfair? No one has to supply Wal-Mart goods at a low price. If a supplier does not want to do business with Wal-Mart, then it doesn’t have to. No one has to take a job there either! |
| | | | |
| − | In general, the demand for inputs by firms is called the “derived demand for inputs,” because it is derived from the consumer demand for the products the company sells. Because your family wants to buy gas from a gas station, this demand creates a demand by the station for its inputs: the gas and labor. | + | In general, the demand for inputs by firms is called the “derived demand for inputs,” because it is derived from the consumer demand for the products the company sells. Because your family wants to buy gas from a gas station, this demand creates a demand by the gas station for its inputs: the gas and labor. |
| | | | |
| | ==Review: Monopsony== | | ==Review: Monopsony== |
| | | | |
| − | '''''A monopsony means only one buyer'''''. One buyer holds a monopoly on all purchases. | + | '''''A monopsony means only one buyer'''''. It occurs when one buyer holds a monopoly on all purchases. |
| | | | |
| − | The best example of a monopsony is when there is only one employer in a small, isolated town. If you want a job in that town, then your only place to work is at that company. Of course, very few towns are actually limited to just one employer. But for a certain type of job, there may be only one employer, and it has a monopsony over that type of job. | + | The best example of a monopsony is when there is only one employer (only one "buyer" of labor) in a small, isolated town. If you want a job in that town, then your only place to work is at that company. Of course, very few towns are actually limited to just one employer. But for a certain type of job, there may be only one employer, and it has a monopsony over that type of job. |
| | | | |
| | A monopsony is different from a competitively hiring firm in one significant way. When a monopsony needs to hire an additional worker, then it has to raise the wages for all its workers to that higher wage level in order to hire an additional worker. Its marginal cost for paying for this "factor" (labor), also known as its marginal factor cost (“MFC”), is more than the wage of merely the one additional worker. MFC equals the W of the additional worker PLUS the increased wage of all the other workers. | | A monopsony is different from a competitively hiring firm in one significant way. When a monopsony needs to hire an additional worker, then it has to raise the wages for all its workers to that higher wage level in order to hire an additional worker. Its marginal cost for paying for this "factor" (labor), also known as its marginal factor cost (“MFC”), is more than the wage of merely the one additional worker. MFC equals the W of the additional worker PLUS the increased wage of all the other workers. |
| Line 196: |
Line 196: |
| | How about employee number 5? His marginal cost is $70, and he brings in marginal revenue of 12 x 5 = $60. He’s losing money for you also. Fire him too. | | How about employee number 5? His marginal cost is $70, and he brings in marginal revenue of 12 x 5 = $60. He’s losing money for you also. Fire him too. |
| | | | |
| − | Your firm hires four workers and no more. Anyone beyond your fourth employee is a money-loser for you. This is because of declining marginal product of labor. | + | Your firm hires four workers and no more. Anyone beyond your fourth employee is a money-loser for you. This is because there is a declining marginal product of labor. |
| | | | |
| | ==Review== | | ==Review== |