The Economizing Problem

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