Transcript The Economizing Problem

The Economizing
Problem
Chapter 2
Unlimited Wants
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Economic wants are desires of people to use
goods and services that provide utility, which
means satisfaction
Products classified as luxuries or necessities
(subjective)
Services & goods satisfy wants
Over time, wants change as well as multiply
Scarce Resources
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Resources are limited relative to wants
Resources also called “factors of production”
(4)
Land (Natural Resources)
Labor
Capital or Investment Goods
Entrepreneurship or Innovation
Resource Payments
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Rent & Interest to suppliers of property
Wages & Salaries to Labor
Profits to Entrepreneurs
Employment & Efficiency
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Economics requires full employment of
available resources and full production
Full employment – All resources are used
Full production – Employed resources are
providing maximum output
Full Production
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Two types
1. Allocative efficiency – resources are used to
provide the combination of goods & services
that are in the highest demand
2. Productive efficiency – production techniques
that cost the least are used
The right goods (allocative) the right way
(productive)
Production Possibilities
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Just a way to express graphically or with a chart,
table, etc. how resources are being employed or
allocated
Assumptions:
Available resources are fixed
Technology is constant
Only two products produced
Economy operating efficiently
Production Possibilities Cont’d
Points inside the curve (line) indicate
unemployment or misallocation of resources
 Points outside indicate unattainable levels
of production
Optimal use of resources is indicated by a point
on the curve, exact point is determined by that
particular society
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Law of Increasing Opportunity
Costs
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The amount of a product sacrificed in order to
produce a different product is called the
opportunity cost
This cost will increase as the amount produced
increases. Curve becomes steeper
Economic Rationale
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Products are not always adaptable to alternative
uses and may not be well suited for each other.
This will increase cost and limit productivity and
output.
The ultimate deciding factor in an economy is
whether or not the cost outweighs the benefit or
vice versa
MARGINAL COST vs MARGINAL BENEFIT
Unemployment, Growth, &
The Future
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If resources increase or technology improves
the entire curve will shift outward
The opposite is true if production decreases or
unemployment is experienced
Present day investment decisions obviously will
effect future production
Specialization & Trade
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Output can be increased beyond resource limits
through specialization & trade.
Adam Smith – Absolute Advantage
David Ricardo – Comparative Advantage
Same effect as increased resources or improved
technology
Applications
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How would the following effect the output of a
given economy?
War
Technological innovation
Workplace discrimination
Recession
Market Economy
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Private ownership of resources
Markets and prices determine economic activity
Freedom of choice
Limited role of the government
US version of capitalism has seen recently a
large role played by the gov’t
Command Economy
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Government controls resources
Economy centrally planned
North Korea, Cuba, Iran are examples
Circular Flow Model