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The Economizing Problem

The Economizing Problem. Chapter 2. Unlimited Wants. 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

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The Economizing Problem

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  1. The Economizing Problem Chapter 2

  2. Unlimited Wants • 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

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

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

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

  6. Full Production • 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)

  7. Production Possibilities • 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

  8. 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

  9. Law of Increasing Opportunity Costs • 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

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

  11. Unemployment, Growth, & The Future • 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

  12. Specialization & Trade • 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

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

  14. Market Economy • 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

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

  16. Circular Flow Model

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