1. The Economizing Problem
Human economic wants are unlimited
Resources are scarce
All economics depends directly on these two facts/assumptions
Economics is about doing the best with what we have
it’s about using resources in the most efficient manner possible to create the most “stuff” to fulfill wants
In Chapter 1, we threw out lots of concepts and definitions. Now, let’s start to make some sense of them and to synthesize them into coherent thoughts that reflect the core principles of economics.
As economists, we always start with the core economizing problem.
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2. Resources – Factors of Production
Types of resources:
Land
All natural resources (“gifts of nature”) Minerals, forests, arable land, oil, etc.
Income from Land = Rent
Capital: human/physical
machinery, factories, storage facilities, transportation
Income from capital = Interest
Labor
All physical and mental talents of individuals
Income from Labor = Wages
Entrepreneurship
Initiative, Management, Innovation, Risk-taking
Income from Entrepreneurship = Profit/Loss
It is a fundamental fact that economic resources are scarce.
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Note some definitions that differ from common usage here. Land is any natural resource, not just a plot of land. So trees, oil, minerals are all part of land.
Capital goods do not include money. Money produces nothing, but rather acts as a medium of exchange for goods and services that do have inherent value and use in creating other goods and services. We spend a good deal of time on money at the end of the course.
But you have to be careful. What we think of as capital is actually capital finance, which is a means to purchase real capital.

3. Economic Systems
An economic system is a particular set of institutional arrangements and mechanisms that respond to the economizing problem
The market system -- “capitalism”
The command system -- “communism”
When we take the economizing problem out of the realm of theory and into reality, societies are complex beasts. The issues are numerous and contentious. So, societies create a particular set of institutions, laws, beliefs that help us to determine how best to make difficult trade-offs. Do we spend more on education and less on agriculture? Do we strive for full employment of every human being, or do we acknowledge that for some period of a person’s life, they should be devoted to developing their bodies, minds, and skills?
These institutions, laws, and beliefs we know as systems.
One approach is to let the market decide. Next week, we’ll spend a good deal of time on this topic. In a market system, each economic entity acts in their own self-interest, making decisions by maximizing the marginal benefit = marginal cost equation. This means there is private ownership of the means of production and no controls on what is produced or purchased. Goods and services are produced by whoever is willing and able to do it. Goods are purchased by the highest bidder for those goods. In pure laissez-faire society, the government has very little economic role to play.
While we would call the USA a capitalist society, and without question it is, the government’s role is much more significant than what pure theory might dictate.

4. The two economic sectors
Households - Consumers
individuals in their private lives acting as consumers and producers
Business – Firms - Producers
firms seeking to maximize their profit by purchasing productive resources

5. The Market Economy and the Circular Flow Model
Virtually all major economies work through some version of the market economic system
In this system, there are a number of different aspects to the market
a market to buy and sell resources
a market to buy and sell products
businesses
households
The market system is clearly the predominant economic system in the world. Virtually ever major economy operates that way, and the few remaining command systems are generally considered failures. Even China, with a command political system has adopted a freeish market system for its economy.
In a market economy, we need to allocate resources to create products. So, at the highest level of abstraction, the market has two players and two arenas for exchange of resources and products.
A market is an institution or a mechanism that brings together buyers and sellers of particular goods, services, or resources.

6. Building the Circular Flow Model - Step 1
RESOURCE
FACTOR
MARKET
BUSINESSES
HOUSEHOLDS
PRODUCT
MARKET

7. Building the Circular Flow Model - Step 2
RESOURCE
FACTOR
MARKET
RESOURCES
INPUTS
BUSINESSES
HOUSEHOLDS
PRODUCT
MARKET

8. Building the Circular Flow Model - Step 3
COSTS
INCOMES
RESOURCE
MARKET
RESOURCES
INPUTS
BUSINESSES
HOUSEHOLDS
GOODS &
SERVICES
GOODS &
SERVICES
PRODUCT
MARKET

9. Building the Circular Flow Model - Step 4
COSTS
INCOMES
RESOURCE
MARKET
RESOURCES
INPUTS
BUSINESSES
HOUSEHOLDS
GOODS &
SERVICES
GOODS &
SERVICES
PRODUCT
MARKET

10. Building the Circular Flow Model - Step 5
COSTS
INCOMES
RESOURCE
MARKET
RESOURCES
INPUTS
BUSINESSES
HOUSEHOLDS
Notice that the real good flow is counterclockwise and the payment flow is clockwise.
GOODS &
SERVICES
GOODS &
SERVICES
PRODUCT
MARKET
REVENUE
Profit from goods and services
PAYMENT
Goods+Services

11. Factor Market Product Market Money for wages, rent, profit, interest
Capital, land, labor, entrepreneurship
BUSINESSES
HOUSEHOLDS
Notice that the real good flow is counterclockwise and the payment flow is clockwise.
Goods and Services
Money PAYMENT for Goods +Services
Product Market

12. How can An Economy become more productive???
Specialization
Takes place when people, businesses, regions, and even countries concentrate on goods and services that they can produce better than anyone else

13. Division of Labor
the breaking down of a job into separate, smaller, tasks, which are performed by different workers.

14. Technological Advances Robotics: machines perform physical tasks
Assembly Line -A manufacturing process in which interchangeable parts are added to a product to create an end product
Technological Advances
Robotics: machines perform physical tasks
Invention: new goods and services
Innovation: Improving a good or service
Automation: machines control production

15. Labor/Workers
-Blue-collar workers: working class employee who perform manual/unskilled labor
Ex: factory worker
-White-collar workers: perform tasks that require less physical labor. Skilled workers oftentimes are more highly paid than blue-collar workers. Ex: doctors, lawyers, administrators
-Pink-collar workers: workers who work in the charitable sector Ex: Susan G. Koman
-Green-collar workers: workers who work in the environmental sector Ex:

16. Ex: mortgage payments, rent Salary [ie the manager]
Economic decision making requires people to consider all the costs and benefits of a decision
Fixed Costs
-Costs or expenses that are the same no matter how many units of a good are produced
Ex: mortgage payments, rent
Salary [ie the manager]

17. Variable Costs
-Costs or expenses that change with the number of products produced
Ex: wages, raw materials, electricity bills, water bills
-These costs increase when production increases and decrease when production decreases

18. Total Costs
-Fixed Costs + Variable costs= Total costs

19. Key Terms and Concepts Economizing problem Utility Economic resources
Land
Capital
Investment
Labor
Entrepreneurial ability
Factors of production
Full employment
Full production
Productive efficiency
Allocative efficiency
Consumer goods
Capital goods
Production possibilities table
Production possibilities curve
Opportunity cost
Law of increasing opportunity costs
Economic growth
Economic system
Market system
Command system
Resource market
Product market
Circular flow model