2
C HAPTE R
1
The
Economizing
Problem
The foundation of economics is the economizing
problem: wants are unlimited while resources are
limited or scarce.
Two fundamental facts
A. the first fundamental fact: Unlimited wants:
1. Economic wants are desires of people to use goods and
services that provide utility, which means pleasure, happiness,
or satisfaction.
2
2.
Products are sometimes classified as luxuries or necessities,
but the division is subjective.
3.
Services satisfy wants as well as goods.
Businesses and governments also have wants.
Over time, wants change and multiply.
4.
5.
3
B. the second fundamental fact: Scarce resources:
1. Economic resources are limited relative to wants.
2. Economic resources are sometimes called factors of
production (inputs) and include four categories:
a.
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Land (natural resources),
B. Capital or investment goods which are all manufactured aids to
production like tools, equipment, factories, transportation, etc.,
c. Labor or human resources, which include physical and mental
abilities used in production (hours).
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d. Entrepreneur: a special kind of human resource that provides
four important functions:
Takes the initiative: combining the resources (land,
capital and labor to produce a good or a service.
ii. Makes Policy Decisions: The non routine decisions
that set the course of a business Combines resources
needed for production
iii. Innovator: commercializes new products, new
production techniques or even new forms of a
business organization (AMAZON.COM)
iv. Bears the risk: of time, effort and funds
i.
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RESOURCE PAYMENTS
PROPERTY RESOURCES
LAND
Rent or Rental Income
CAPITAL
Interest Income
HUMAN RESOURCES
LABOR
ENTREPRENEUR
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WAGES
PROFIT & LOSS
Employment and Efficiency
Economics is a science of efficiency in the use of scarce
resources. Efficiency requires full employment of available
resources and full production.
1.
Full employment means all available resources should be
employed.
2. 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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PRODUCTION POSSIBILITIES
A Consumer Good
9
for example...
PRODUCTION POSSIBILITIES
A Capital Good
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PRODUCTION POSSIBILITIES
in table form
PIZZA
0
1
2
3
4
9
7
4
0
(in hundred thousands)
ROBOTS
(in thousands)
12
10
PRODUCTION POSSIBILITIES
in table form
PIZZA
0
1
2
3
4
9
7
4
0
(in hundred thousands)
ROBOTS
10
(in thousands)
13
(thousands)
Robots
graphical form
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
in table form
PIZZA
0
1
2
3
4
9
7
4
0
(in hundred thousands)
ROBOTS
10
(in thousands)
14
(thousands)
Robots
graphical form
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
in table form
PIZZA
0
1
2
3
4
9
7
4
0
(in hundred thousands)
ROBOTS
10
(in thousands)
15
(thousands)
Robots
graphical form
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
in table form
PIZZA
0
1
2
3
4
9
7
4
0
(in hundred thousands)
ROBOTS
10
(in thousands)
16
(thousands)
Robots
graphical form
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
in table form
PIZZA
0
1
2
3
4
9
7
4
0
(in hundred thousands)
ROBOTS
10
(in thousands)
17
(thousands)
Robots
graphical form
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
in table form
PIZZA
0
1
2
3
4
9
7
4
0
(in hundred thousands)
ROBOTS
10
(in thousands)
18
(thousands)
Robots
graphical form
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
Limited Resources means
a 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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Choices will be necessary because resources and technology
are fixed. A production possibilities table illustrates some of
the possible choices.
A production possibilities curve is a graphical representation
of choices.
1.
Points on the curve represent maximum possible
combinations of robots and pizza given resources and
technology.
2.
Points inside the curve represent underemployment or
unemployment.
3.
Points
outside
the
curve
are
unattainable
at
present.
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Optimal or best product-mix:
1.It will be some point on the curve.
2.The exact point depends on society; this is a normative decision.
21
PRODUCTION POSSIBILITIES
Robots (thousands)
Q 14
13
12
11
10
9
8
7
6
5
4
3
2
1
Unattainable
A
C
W
Attainable
& Efficient
D
Attainable
but
Inefficient
E
1
22
B
2
3
4
5
6
7
Pizzas (hundred thousands)
8
Q
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
23
2
3
4
5
6
7
Pizzas (hundred thousands)
8
Q
PRODUCTION POSSIBILITIES
Robots (thousands)
Q 14
24
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
7
E
2
3
4
5
6
Pizzas (hundred thousands)
8
Q
E. Law of increasing opportunity costs:
1.The amount of other products that must be foregone to obtain more
of any given product is called the opportunity cost.
2.Opportunity costs are measured in real terms rather than money
(market prices are not part of the production possibilities model).
3.The more of a product produced the greater is its (marginal)
opportunity cost.
4.The slope of the production possibilities curve becomes steeper,
demonstrating increasing opportunity cost. This makes the curve
appear bowed out, concave from the origin.
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Economic Rationale:
a. Economic resources are not completely adaptable to alternative
uses.
b. To get increasing amounts of pizza, resources that are not
particularly well suited for that purpose must be used. Workers that
are accustomed to producing robots on an assembly line may not do
well as kitchen help.
How does society decide its optimal point on the production
possibilities curve?
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Unemployment, Growth, and the Future
Unemployment and productive inefficiency occur when the
economy is producing less than full production or inside the curve
(point U in the following figure).
In a growing economy, the production possibilities curve shifts
outward:
1.when resource supplies expand in quantity or quality.
2.when technological advances are occurring.
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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
1
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More of either or
both is possible
U
2
3
4
5
6
7
Pizzas (hundred thousands)
8
Q
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
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2
3
4
5
6
7
Pizzas (hundred thousands)
8
Q
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 – Increase
in
resource
supplies
Shown
by Point U
2 – Better resource
U quality More of
either or
both is possible
3 – Technological
advances
1
30
2
3
4
5
6
7
Pizzas (hundred thousands)
8
Q
PRODUCTION POSSIBILITIES
Robots (thousands)
Q 14
A’
13
12
11
10
9
8
7
6
5
4
3
2
1
C’
D’
E’
1
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Economic Growth
B’
2
3
4
5
6
7
Pizzas (hundred thousands)
8
Q
Present choices and future possibilities:
Using resources to produce consumer goods and services represents a
choice for present over future consumption. Using resources to invest in
technological advances, education, and capital goods represents a choice
for future over present goods. The decision as to how to allocate resources
in the present will create more or less economic growth in the future.
(See for example Global Perspective 2-1 where various countries are
compared with respect to their economic growth rates relative to the share
of GDP devoted to investment.)
D.A Qualification: International Trade
1. A nation can avoid the output limits of its domestic Production Possibilities
through international specialization and trade.
2. Specialization and trade have the same effect as having more and better
resources of improved technology.
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PRODUCTION POSSIBILITIES
Two Examples of Economic Growth
Goods for the Future
ALTA - FAVORS
PRESENT GOODS
CURRENT
CURVE
FUTURE
CURVE
CONSUMPTION
Goods for the Present
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Alta
PRODUCTION POSSIBILITIES
Two Examples of Economic Growth
CURRENT
CURVE
FUTURE
CURVE
CONSUMPTION
Goods for the Present
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Alta
ZORN - FAVORS
FUTURE GOODS
Goods for the Future
Goods for the Future
ALTA - FAVORS
PRESENT GOODS
CONSUMPTION
FUTURE
CURVE
CURRENT
CURVE
Goods for the Present
Zorn
Economic systems
Economic systems differ in two important ways:
Who owns the factors of production and the method
used to coordinate economic activity.
A. The market system:
1.
2.
3.
4.
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There is private ownership of resources.
Markets and prices coordinate and direct economic activity.
Each participant acts in his or her own self-interest.
In pure capitalism the government plays a very limited role.
Economic systems
B. Command economy, socialism or communism:
1. There is public (state) ownership of resources.
2. Economic activity is coordinated by central planning.
C. Mixed economy
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Chapter 3
INDIVIDUAL MARKETS:
DEMAND & SUPPLY
Coming Soon…
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