1
LECTURE
The
Economizing
Problem
1
Consider...
The Economics Perspective
• SCARCITY & CHOICE
• RATIONAL BEHAVIOR
• MARGINAL ANALYSIS
Marginal Benefits &
Marginal Costs
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ECONOMIC GOALS
•Economic Growth
•Full Employment
•Economic Efficiency
•Price-Level Stability
•Economic Freedom
•Equitable Distribution
•Economic Security
•Balance of Trade
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MACROECONOMICS...
MICROECONOMICS...
4
MACROECONOMICS...
MICROECONOMICS...
Positive Economics
Absolute Facts
Normative Economics
What Ought to be
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THE FOUNDATION OF
ECONOMICS
SOCIETY HAS VIRTUALLY
UNLIMITED WANTS...
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THE FOUNDATION OF
ECONOMICS
SOCIETY HAS VIRTUALLY
UNLIMITED WANTS...
BUT LIMITED OR SCARCE
PRODUCTIVE RESOURCES!
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SCARCE RESOURCES
ECONOMIC RESOURCES
PROPERTY RESOURCES
LAND
8
SCARCE RESOURCES
ECONOMIC RESOURCES
PROPERTY RESOURCES
LAND
CAPITAL
9
SCARCE RESOURCES
ECONOMIC RESOURCES
PROPERTY RESOURCES
LAND
CAPITAL
HUMAN RESOURCES
10
SCARCE RESOURCES
ECONOMIC RESOURCES
PROPERTY RESOURCES
LAND
A/K/A
Factors
CAPITAL
Of
HUMAN RESOURCES
Production
LABOR
ENTREPRENEURIAL ABILITY
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ENTREPRENEURIAL
ABILITY
Takes The Initiative
Makes Policy Decisions
Innovator
The Risk Bearer
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RESOURCE PAYMENTS
PROPERTY RESOURCES
RENTAL
LAND
INCOME
INTEREST
CAPITAL
INCOME
HUMAN RESOURCES
LABOR
ENTREPRENEUR
WAGES
PROFIT &
LOSS
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PRODUCTION POSSIBILITIES
Assumes...
Full Employment &
Productive Efficiency
Fixed Resources
Fixed Technology
Two Products
for example...
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PRODUCTION POSSIBILITIES
A Consumer Good
Assumes...
Efficiency
Fixed Resources
Fixed Technology
Two Products
for example...
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PRODUCTION POSSIBILITIES
A Capital Good
Assumes...
Efficiency
Fixed Resources
Fixed Technology
Two Products
for example...
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PRODUCTION POSSIBILITIES
What if we could only produce ...
10,000 Robot Arms
or
400,000 Pizzas
Using all of our resources, to
get some pizza, we must give
up some robot arms!
for example...
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PRODUCTION POSSIBILITIES
in table form
PIZZA
0
1
2
3
4
9
7
4
0
(in hundred thousands)
Robots
10
(in thousands)
(thousands)
Robots
graphical form
Pizzas (hundred thousands)
18
PRODUCTION POSSIBILITIES
in table form
PIZZA
0
1
2
3
4
9
7
4
0
(in hundred thousands)
Robots
10
(in thousands)
(thousands)
Robots
graphical form
Pizzas (hundred thousands)
19
PRODUCTION POSSIBILITIES
in table form
PIZZA
0
1
2
3
4
9
7
4
0
(in hundred thousands)
Robots
10
(in thousands)
(thousands)
Robots
graphical form
Pizzas (hundred thousands)
20
PRODUCTION POSSIBILITIES
in table form
PIZZA
0
1
2
3
4
9
7
4
0
(in hundred thousands)
Robots
10
(in thousands)
(thousands)
Robots
graphical form
Pizzas (hundred thousands)
21
PRODUCTION POSSIBILITIES
in table form
PIZZA
0
1
2
3
4
9
7
4
0
(in hundred thousands)
Robots
10
(in thousands)
(thousands)
Robots
graphical form
Pizzas (hundred thousands)
22
PRODUCTION POSSIBILITIES
in table form
PIZZA
0
1
2
3
4
9
7
4
0
(in hundred thousands)
Robots
10
(in thousands)
(thousands)
Robots
graphical form
Pizzas (hundred thousands)
23
PRODUCTION POSSIBILITIES
Limited Resources means
limited output...
At any point in time,
a full-employment, fullproduction economy
must sacrifice some of
product X to obtain
more of product Y.
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PRODUCTION POSSIBILITIES
Robots (thousands)
Q 14
13
12
11
10
9
8
7
6
5
4
3
2
1
Unattainable
A
B
C
W
Attainable
& Efficient
D
Attainable
but
Inefficient
E
1
2
3
4
5
6
7
Pizzas (hundred thousands)
8
Q
25
PRODUCTION POSSIBILITIES
Robots (thousands)
Q 14
13
12
11
10
9
8
7
6
5
4
3
2
1
Notes...
Unattainable
LAW OF INCREASING
A OPPORTUNITY
COSTS
B
The amount
of other
C
W
products that must be
forgone or D
sacrificed to
Attainable
obtain 1 unit of a specific
product is called the & Efficient
Attainable
opportunity
cost of that
but
good.
Inefficient
E
1
2
3
4
5
6
7
Pizzas (hundred thousands)
8
Q
26
PRODUCTION POSSIBILITIES
Robots (thousands)
Q 14
13
12
11
10
9
8
7
6
5
4
3
2
1
Notes...
Unattainable
LAW OF INCREASING
A OPPORTUNITY
COSTS
B
A graph of the production
C
possibilities curve W
will be
CONCAVE - bowed out from
D
Attainable
the origin.
&
Attainable
Economic resources are
but
not completely adaptInefficient
able
to other uses.
Efficient
1
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E
2
3
4
5
6
Pizzas (hundred thousands)
8
Q
27
PRODUCTION POSSIBILITIES
Robots (thousands)
Q 14
Unemployment &
Underemployment
Shown by Point U
13
12
11
10
9
8
7
6
5
4
3
2
1
More of either or
both is possible
U
1
2
3
4
5
6
7
Pizzas (hundred thousands)
8
Q
28
PRODUCTION POSSIBILITIES
Robots (thousands)
Q 14
13
12
11
10
9
8
7
6
5
4
3
2
1
Notes...Unemployment
Economic Growth
&
Underemployment
The ability to produce
by- Point U
a largerShown
total output
a rightward shift of
the production
More
of
either
or
U
possibilities curve
caused by...both is possible
1
2
3
4
5
6
7
Pizzas (hundred thousands)
8
Q
29
PRODUCTION POSSIBILITIES
Robots (thousands)
Q 14
13
12
11
10
9
8
7
6
5
4
3
2
1
Notes...Unemployment
Economic Growth
&
Underemployment
1 - Increases
in
resources
Shown
by Point U
2 - Better resource
U quality - More
of either or
both is possible
3 – Technological
advances
1
2
3
4
5
6
7
Pizzas (hundred thousands)
8
Q
30
PRODUCTION POSSIBILITIES
Robots (thousands)
Q 14
A’
13
12
11
10
9
8
7
6
5
4
3
2
1
Economic Growth
B’
C’
D’
E’
1
2
3
4
5
6
7
Pizzas (hundred thousands)
8
Q
31
PRODUCTION POSSIBILITIES
Two Examples of Economic Growth
CURRENT
CURVE
FUTURE
CURVE
CONSUMPTION
Goods for the Present
FAVORING
FUTURE GOODS
Goods for the Future
Goods for the Future
FAVORING
PRESENT GOODS
CONSUMPTION
FUTURE
CURVE
CURRENT
CURVE
Goods for the Present
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