The Problem Unlimited wants the 1st fundamental fact Economic wants are the desires of people to use g/s that provide utility (satisfaction) Luxury and necessities This applies to all economic actors in an economy Wants change and increase over time

The Problem cont. Scarce Resources the 2nd fundamental fact Resources are limited relative to wants Resources are also known as factors of production: LAND OR NATURAL RESOURCES CAPITAL OR INVESTMENT GOODS LABOR OR HUMAN RESOURCES ENTREPRENURIAL ABILITY

THE Problem cont. Payments for resources correspond to the category Rent and interest to suppliers of property resources (land and capital respectively) Wages and salaries to labor resources Profits to entrepreneurs REMEMBER: quantities of resources are limited relative to the total amount of g/s desired

Employment and Efficiency Employment defined for this example: the use of resources for a specific purpose. Full employment in this sense is defined as the use of all available resources Full production is defined as the maximum production of g/s to satisfy economic wants Together these two equate to EFFICIENCY

Two Kind of Efficiency Implied Full Production can imply 2 efficiencies Productive Efficiency: the least costly method of production is used to produce g/s Allocative Efficiency: resources are used to create those g/s most wanted by society in whatever combination

Production Possibilities Table and Curve Assumptions of table and curve: Economy is operating efficiently (full production and full employment) Available resources are fixed in quantity an quality at this particular point in time Technology is constant Economy produces only TWO types of products

Production Possibilities cont. Production Possibilities Table illustrates possible choices A PPC is a graphical representation of those choices Points on the curve =maximum production of the two products in this economy Points inside the curve = underemployment of resourcess Points outside the curve = unattainable production given current restraints on production

Where should an economy produce? The Optimal or best product mix will be at some point on the curve. The exact point depends on the society. This is a normative decision.

Opportunity Costs and the PPC All PPC’s indicate opportunity costs in the production of products. Constant opportunity costs imply that resources are perfectly exchangeable Most PPC are indicative of increasing opportunity costs

Law of Increasing Opportunity Costs The amount of OTHER product that must be given up to obtain more of a given product is the opportunity cost. This is similar to the opportunity cost you incur in decision making. Opportunity costs are measured in product not in money as price is not part of the PPC model

continued The more of a product produced the greater its opportunity cost (marginality). The slope of the PPC becomes steeper demonstrating increasing opportunity cost Rationale for PPC: Resources are not completely adaptable to alternative uses Some resources are better suited to production of some goods than others.

Allocative Efficiency How do societies determine the optimal point of production? If the MB of the product exceeds its MC than society will most likely agree to further production of this product The converse is also true Marginal costs rise as more of a product is produced

continued Marginal benefits decline To generalize: optimal production will take place where the MB is equal to the MC.

Types of Economic Systems Traditional Capitalist/Market/Free Market Command/Socialist/Communist Mixed/Social Democratic/Corporate Capitalism

Simple Circular Flow Models Flow models help us to understand the movement of the different parts of the economic system in capitalism. These models can become extremely sophisticated as we will see in the latter part of the course. Please be sure you UNDERSTAND THE FLOWS COMPLETELY.