Chapter 2: The Economizing Problem AP Macroeconomics

The Economizing Problem Foundations based on 2 facts: Society’s economic wants (unlimited & insatiable) Economic Resources (scarcity)

Want Versus Needs Consumers may desire a product but not need it; therefore unfilled wants Objective of economic activity is to fulfill wants

Scarce Resources All natural, human, and manufactured resources that go into the production of goods and services

Resource Categories Four Factors

Resource Categories (1/4) Land: includes arable land, forests, mineral, oil, water…

Resource Categories (2/4) Capital (capital goods): all manufactured aids used in production Tools, machinery, equipment, factory, storage, transportation…

Resource Categories (3/4) Labor: all physical and mental talents of individuals

Resource Categories (4/4) Entrepreneurial Ability Takes Initiative, driving force behind production Strategic business decisions Innovator Risk bearer

Resource Payments Retail and investment income Income from supplying materials Those who supply labor (wages) Entrepreneurial income (profits)

Economics: Employment and Efficiency

Full Employment The use of all available resources All willing workers employed All capital and land in use *A great idea?* (Kids, Conservation, Holidays)

Full Production All employed resources used to provide maximum possible satisfaction of wants Failure to achieve this is known as resource underemployed

Productive Efficiency Production of goods and services in the least costly way

Allocative Efficiency Apportioning resources amongst industry to obtain right combination of goods and services

Production Possibilities Table Used to assist people to choose goods and services to produce and which to forgo

Production Possibilities Table Lists different combinations of the two products

Production Possibilities Table Assumptions: Full employment and productive efficiency Fixed resources Fixed technology Two goods to contrast (consumer vs. capital goods)

The Need for Choice To favor one product would limit production of the other More consumer goods means less capital goods

Production Possibilities Curve Production Alternatives Type of Product A B C D E Pizzas (in thousands) 1 2 3 4 Robots (in thousands) 10 9 7 Data presented from table to graph

Production Possibilities Curve Law of Opportunity Costs The more of a product produced, the greater opportunity cost

Economic Rationale Economic resources are not completely adaptable to alternative uses Lack of flexibility cause increased opportunity costs Example of farm land, grow ingredients or mine minerals

Allocative Efficiency After studying curve, what is the optimal point of production? Marginal Benefit (MB) = Marginal Costs (MC)

Unemployment, Growth, the Future

Unemployment Causes economy to produce less and be less efficient (U) Discrimination can lead to less output

Growth Amount of resources may change over time Examples: Bigger population, more irrigation, oil discoveries Not a guarantee for future growth

Advances in Technology Technology can increase possibilities “Dot.com Bubble”

Present Choices and the Future Goods for the present represent consumer goods Goods for the future create growth

International Trade Directing resources to efficient products to sell abroad

Economic Systems Market versus Command

Economic Systems Institutional arrangements and coordinating mechanism Differ as Who owns production? Method used to coordinate and direct activity

The Market System (Capitalism) Private ownership of resources Use of markets and prices to coordinate and direct economy Individuals act in their own self-interest Competition drives production

The Market System (Capitalism) “Pure” Capitalism Laissez-Faire policies limit the role government plays Complete Laissez-Faire can be dangerous, as-well-as complete control

The Command System (Socialism) Government owns property resources and economic decisions occurs through a central planning board Board decides production goals, resource allocation

The Circular Flow Model Households and Businesses Key Market Decision Makers

The Circular Flow Model Interrelated web of decision making and economic activity of households and businesses Real Flow Money Flow

The Resource Market Resource Market Place where resources or services of suppliers are bought and sold

The Production Model Production Market Place where goods and services by businesses are bought and sold