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The Economizing Problem. Chapter Two. The Foundation of Economics. Economizing Problem Limited resources Unlimited wants Utility- usefulness or satisfaction. Unlimited wants. Wants extend over a wide range of products (necessities…luxuries).
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The Economizing Problem Chapter Two
The Foundation of Economics • Economizing Problem • Limited resources • Unlimited wants • Utility- usefulness or satisfaction
Unlimited wants • Wants extend over a wide range of products (necessities…luxuries). • Wants change due to the introduction of new products. • The objective of all economic activity is to fulfill wants.
Resource categories • Land • Capital • Labor • Entrepreneurial ability Called the factors of production
Resource Payments • Income from supplying resources: • Land & capital- rental & interest income • Labor- wages • Entrepreneurial income- profits
Full Employment • Nobody should be out of a job if they are willing and able to work.
Full Production • Resources should be used to the maximum possible efficiency. • Two types of efficiency: • Productive • Allocative
Production Possibilities Table • Lists different combinations of two products that can be produced. • Assumptions • Full employment and productive efficiency • Fixed resources • Fixed technology • Two goods
Production Possibilities Table Pizza & Robots Production Alternatives
Unemployment & Productive Inefficiency • Unemployment or productive inefficiency falls inside the production possibilities curve. • Growing Economy – Curve shifts outward • Increase in resource supplies • Advances in technology
Opportunity Cost • The amount of a product that must be given up to obtain 1 unit of a specific good. • Law of Increasing Opportunity Cost • The more of a product that is produced, the greater is its opportunity cost.
Types of Economic Systems • Market System • Command System • Traditional System • Mixed System
Market System • Each participant acts in his/her own self-interest. • Each individual or business seeks to maximize its satisfaction or profit. • Private ownership of resources • Prices to coordinate and direct economic activity
Command System • Also known as Socialism or Communism • Government owns most property resources • Economic decision making occurs through a central economic plan.
Traditional System • Relies on traditions and customs from the past • Found in rural areas where families are self-sufficient
Mixed System • Blend of market, command, & traditional economic systems
Circular Flow Model • Two groups of decision makers (households & businesses) • Two broad markets (resource market & product market)