Chapter 2:
The Economizing Problem
1. The foundations of Economics
a. Society has virtually unlimited wants but limited or scarce productive
resources
b. Goods and services provide utility
i. Luxuries vs. Necessities
2. Scarce Resources
a. Economic Resources are limited relative to wants
b. Sometimes called factors of productions and include four categories:
i. Land or natural resources
ii. Capital or investment goods
1. Manufactured aids, goods, or services
iii. Investment Goods
1. Real capital (MONEY!!!)
2. Financial Capital
iv. Human Resources
1. Labor or human resources which include physical and
mental abilities used in production
v. And Entrepreneurial Ability
1. Special kind of human resources that combines
resources for production, makes basic business
economic policy decisions, innovator for services and
goods
2. Takes initiative and combines resources
3. Resource Payments
a. Property Resources
i. Land: Rental income
ii. Capital: Interest income
b. Human Resources
i. Labor: Wages
ii. Entrepreneur: Profits and Losses
4. Economics and Efficiency
a. Full Employment: all available resources should be employed
b. Full Production: employed resources are providing full satisfaction of
our economic wants
i. Implies two kinds of efficiency: Productive and Allocative
ii. Underemployed if full production is not occurring
c. Productive Efficiency: the least costly production techniques are used
to produce wanted goods or services
i. You produce things as cheaply as possible
d. Allocative Efficiency: resources are used to produce the combination
of goods and services most wanted by society
5. Production Possibilities
a. Production possibilites tables and curves are devices used to clarify
the economizing problem
i. Assumes economy is operating efficiently
1. Means full production and full employment
ii. Fixed Resources: the available supply of resources is fixed in
quality and quantity at this time
iii. Fixed Technology: technology hasn’t increased or improved
iv. The Economy only produces two products
b. Limited resources means limited output
i. At any point in time, a full-employment, full-production
economy must sacrifice some of product X to obtain more
product of Y.
c. Law of Increasing Opportunity Costs: The amount of other products
that must be forgone or sacrificed to obtain one unit of a specific
product is called the opportunity cost of that good.
i. Economic resources are not completely adaptable for other
uses
d. Allocative Efficiency: MB = MC
i. Marginal Benefits = Marginal Costs
e. Economic Growth: The ability to produce a larger total output- a
rightward shift of the production possibilities curve caused by:
i. Increase in resources
ii. Better resource quality
iii. Technological advances
6. Economic systems
a. The Market System
i. Pure Capitalism
ii. Laissez-faire
b. The Command System
i. Socialism
ii. Communism