The Economizing
Problem
Chapter 2
Objectives
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Define the economizing problem, incorporating the
relationship between limited resources and unlimited wants
Differentiate between full employment and full production
Explain the concepts of allocative and productive efficiency
and how they differ
Construct a production possibility curve when given
appropriate data
Illustrate economic growth, unemployment &
underemployment of resources, allocative and productive
efficiency and increasing costs using a PPC.
Differentiate between product and resource (factor)
markets
Define and identify the terms and concepts listed at the end
of the chapter
The economizing problem: society’s
material wants are unlimited while
resources are limited or scarce.
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Fundamental Fact: Unlimited Wants
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Economic wants are desires of people to use
goods & services that provide utility, which
means more satisfaction
Products are sometimes classified as luxuries
or necessities, but division is subjective
Businesses and gov’t also have wants
Over time, wants change and multiply
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Fundamental fact: Scarce Resources
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Economic resources are limited relative to
wants
Economic resources are called the factors of
production: land, labor, capital and
entrepreneur
4 Factors of Production
1. land
Must be
natural &
is limited
2. capital
Must be used
for production
3. labor
The work
force
4. Entrepreneurs
Risk takers in
search of a
new business
Phil Knight
Nike
Pierre Omidyar
Ebay
Chris DeWolfe & Tom Anderson
My Space
Mark Cuban
Broadcast.com
Mark Zuckerburg
Facebook
Warren Buffett--Berkshire Hathaway
Sean Combs
Bad Boy Records
Economics: Employment and
Efficiency
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Efficiency requires full employment of
available resources and full production
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Full employment means all available resources
should be used
Full production means that employed
resources are providing maximum satisfaction
of our economic wants. Underemployment
occurs if this is not so.
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Full production implies two types of
efficiency
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ALLOCATIVE efficiency means that resources
are used for producing the combination of
goods and services most wanted by society
PRODUCTIVE efficiency means that least costly
production techniques are used to produce
wanted goods and services
In other words:
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Full production means producing the
“right” goods (allocative efficiency) in the
“right” way (productive efficiency)
Circular Flow
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See document manager or board
Write down the following list
--goods & services
--goods & services
--business income
--income from resources
--land, labor, capital, entrepreneur
--consumer spending
--buy productive resources
--payment for resources
Production Possibilities Frontier or Curve
Big Graph #1
 See graph (document manager or board)
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