The Economizing Problem Chapter 2

Unlimited Wants Economic wants are desires of people to use goods and services that provide utility, which means satisfaction Economic wants are desires of people to use goods and services that provide utility, which means satisfaction Products classified as luxuries or necessities (subjective) Products classified as luxuries or necessities (subjective) Services & goods satisfy wants Services & goods satisfy wants Over time, wants change as well as multiply Over time, wants change as well as multiply

Scarce Resources Resources are limited relative to wants Resources are limited relative to wants Resources also called “factors of production” (4) Resources also called “factors of production” (4) Land (Natural Resources) Land (Natural Resources) Labor Labor Capital or Investment Goods Capital or Investment Goods Entrepreneurship or Innovation Entrepreneurship or Innovation

Resource Payments Rent & Interest to suppliers of property Rent & Interest to suppliers of property Wages & Salaries to Labor Wages & Salaries to Labor Profits to Entrepreneurs Profits to Entrepreneurs

Employment & Efficiency Economics requires full employment of available resources and full production Economics requires full employment of available resources and full production Full employment – All resources are used Full employment – All resources are used Full production – Employed resources are providing maximum output Full production – Employed resources are providing maximum output

Full Production Two types Two types 1. Allocative efficiency – resources are used to provide the combination of goods & services that are in the highest demand 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 2. Productive efficiency – production techniques that cost the least are used The right goods (allocative) the right way (productive) The right goods (allocative) the right way (productive)

Production Possibilities Just a way to express graphically or with a chart, table, etc. how resources are being employed or allocated Just a way to express graphically or with a chart, table, etc. how resources are being employed or allocated Assumptions: Assumptions: Available resources are fixed Available resources are fixed Technology is constant Technology is constant Only two products produced Only two products produced Economy operating efficiently Economy operating efficiently

Production Possibilities Cont’d Points inside the curve (line) indicate unemployment or misallocation of resources Points inside the curve (line) indicate unemployment or misallocation of resources Points outside indicate unattainable levels Points outside indicate unattainable levels of production of production Optimal use of resources is indicated by a point on the curve, exact point is determined by that particular society Optimal use of resources is indicated by a point on the curve, exact point is determined by that particular society

Law of Increasing Opportunity Costs The amount of a product sacrificed in order to produce a different product is called the opportunity cost 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 This cost will increase as the amount produced increases. Curve becomes steeper

Economic Rationale 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. 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 The ultimate deciding factor in an economy is whether or not the cost outweighs the benefit or vice versa MARGINAL COST vs MARGINAL BENEFIT MARGINAL COST vs MARGINAL BENEFIT

Unemployment, Growth, & The Future If resources increase or technology improves the entire curve will shift outward If resources increase or technology improves the entire curve will shift outward The opposite is true if production decreases or unemployment is experienced The opposite is true if production decreases or unemployment is experienced Present day investment decisions obviously will effect future production Present day investment decisions obviously will effect future production

Specialization & Trade Output can be increased beyond resource limits through specialization & trade. Output can be increased beyond resource limits through specialization & trade. Adam Smith – Absolute Advantage Adam Smith – Absolute Advantage David Ricardo – Comparative Advantage David Ricardo – Comparative Advantage Same effect as increased resources or improved technology Same effect as increased resources or improved technology

Applications How would the following effect the output of a given economy? How would the following effect the output of a given economy? War War Technological innovation Technological innovation Workplace discrimination Workplace discrimination Recession Recession

Market Economy Private ownership of resources Private ownership of resources Markets and prices determine economic activity Markets and prices determine economic activity Freedom of choice Freedom of choice Limited role of the government Limited role of the government US version of capitalism has seen recently a large role played by the gov’t US version of capitalism has seen recently a large role played by the gov’t

Command Economy Government controls resources Government controls resources Economy centrally planned Economy centrally planned North Korea, Cuba, Iran are examples North Korea, Cuba, Iran are examples

Circular Flow Model