Jacob Schulman
AP Economics
March 8, 2016
Mr. Coggin
Chapter 2: The Economizing Problem
I. The Foundation of Economics:
A. Economizing Problem:
1. Society’s economic wants What the people want is generally unlimited and insatiable
2. Economic resources are limited or scarce
Unlimited Wants:
A. Utility: Ability of goods or services that please or satisfy
- Includes necessities and luxuries
B. Wants and necessities change over time because of new products
C. Services can satisfy our wants; we buy goods for the services they render
D. All our wants are insatiable and unlimited—we can never be fully satisfied
- Wants for a particular good can be, but goods in general cannot
E. The objective of all economic activity is to fulfill wants
Scare Resources:
A. Economic resources are limited or scarce
- Economic Resources: all natural, human, and manufactured resources that are used in
goods or services (products, communications facilities, labor, land and minerals, etc.)
B. Land: includes all natural resources or “gifts of nature” used in production
C. Capital: includes all manufactured aids used in producing consumer goods and services
- Investment: the process of producing and purchasing goods
- Capital Goods: indirect satisfy wants by aiding production of consumer goods
D. Labor: All physical and mental talents of individuals available and usable in producing goods
and services
E. Entrepreneurial Ability: Takes the initiative to combine the resources into a product
- Makes business-policy decisions that set the course of the business
- Innovates and bears the risk in the venture
Resource Payments and Relative Scarcity:
A. Rental Income: Income received from supplying raw materials
B. Interest Income: Income received from capital equipment
C. All 4 factors of production are scarcethere is a finite amount of these things
II. Economics: Employment and Efficiency
A. Economics examines efficiency—how to best use scarce resources
Full Employment: Using Available Resources:
A. Full Employment: Use of all available resources; make use of everyone always
Full Production: Using Resources Efficiently:
A. Full Production: all employed resources should be used so that they provide the maximum
possible satisfaction of our material wants
- When we aren’t at full production, our resources are uneremployed
B. Productive Efficiency: Production of any particular mix of goods and services in the least
costly way; use only what you need
C. Allocative Efficiency: Production of that particular mix of goods and services most wanted by
society; only produce what you need to make
Production Possibilities Table:
A. A full-employment, full-production economy can’t have an unlimited output of goods an
services; people have to choose which ones they want
B. Production Possiblities Model: Assume that there is full employment and productive
efficiency, a fixed number of resources, fixed technology, and only 2 goods
The Need For Choice:
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A. Since all resources are fully employed, must shift production of one to make another
B. Production Possibilities Table: lists the different combinations of 2 products that can be
made with a set amount of resources
- There is a cost with choosing one thing over anotherYou might not have enough of
something that you didn’t really know you needed
C. Generally, at any point in time, an economy with full employment and productive efficiency
must sacrifice some of one good to get more of another (controlled by scarcity)
Production Possiblities Curve:
A. Production Possibilities Curve: Each point represents some maximum output
- The curve is a production frontier because it shows the limit of outputs
- Inside the curve represent inefficiency and aren’t desirable
- Points outside the curve are unattainable with current supplies
Law of Increasing Opportunity Cost:
A. Opportunity Cost: Amount of other products that must be forgone or sacrificed to obtain 1
unit of a specific good
B. Law of Increasing Opportunity Costs: More of a product that is produced, the greater is its
opportunity cost (“marginal” is implied)
Shape of the Curve and Economic Rationale:
A. Economic resources are not completely adaptable to alternative usesWhat you have left
impacts what you can do with it
- There is a lack of perfect flexibility or interchangeability in resources
Allocative Efficiency Revisited:
A. Economic decisions center on comparisons of marginal benefits and marginal costs
B. The When the marginal benefit is greater than the marginal cost, you’re more inclined to
want to produce that particular item
C. Resources are being used efficiently allocated to any product when the marginal benefit and
marginal cost of its output are equal
III. Unemployment, Growth, and the Future:
Unemployment and Productive Inefficiency:
A. With unemployment or inefficient production, the economy would produce less than each
alternative
- Situations of unemployment / productive inefficiency are inside the curve
A Growing Economy:
Increases in Resource Supplies:
A. Resources can change over time; labor quality usually improves over time
B. Such a change in production possibilities doesn’t guarantee that the economy will actually
operate at a point on its new PPC
Advances in Technology:
A. In reality, technology has progressed dramatically over time
B. We characterize advances as improvements in capital facilities
C. When supplies increase or technology improves, the PPC shifts outward to the right
- Economic Growth: ability to produce a larger total output
D. A dynamic, growing economy can have larger quantities of both products
Present Choices and Future Possibilities:
A. Goods for the Future: capital goods, research and education, medicine
- These are the ingredients of economic growth
A Qualification: International Trade:
A. We must modify the PPC when international specialization and trade exist
B. International Specialization: directing domestic resources to output that a nation is highly
efficient at producing
- International Trade: exchanging goods for goods produced abroad
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- Enables you to get more of a good at less sacrifice of another good
Examples and Applications:
Unemployment and Productive Inefficiency:
A. Almost every nation has at one point operated inside their PPC
B. Nations that have a lot of discrimination often operate inside their PPCssociety has less
of an output than it would have had; same for when a society works on heredity or caste
Tradeoffs and Opportunity Costs:
A. Need to decide what’s important and what really isn’t
Shifts in PPCs:
A. We have recently had a burst of new technologiesdrops prices of computers and
enhances their speeds
B. These new technologies are contributing to faster-than-normal US economic growth
C. PPC can collapse inward—things like war and fighting can throw it out of whack
IV. Economic Systems:
A. Economic System: A set of institutional arrangements and a coordinating mechanism
- Differs as to who owns the facts and how they are coordinated
The Market System:
A. Market System / Capitalism: Characterized by private ownership of resources and use of
markets and prices to coordinate direct economic activity
B. Allows for private ownership of capital, and coordinates activity through markets- where
things are bought and sold
- There is competition among independently acting buyers and sellers
C. Pure Capitalism / laissez-faire Capitalism: Government is limited to protecting private
property and establishing an environment appropriate to operation of market system
- Believe that gvt interference would simply disturb the efficiency of the market system
D. Gvt does play a major role in the US though: provides rules, provides goods and services,
modifies the distribution of income
E. The market itself is the dominant force in what to produce and how to do it
The Command System:
A. Command System / Socialism / Communism: Gvt owns most property resources and
economic decision making only occurs through a central plan
B. Gvt owns most business forms that produce what the gvt says to produce
C. Pure Command Economy: relies exclusively on a central plan to allocate the gvt-owned
property resources (but this has really been proven not to work)
V. The Circular Flow Model:
A. Market economy has 2 groups of decision makers: households and businesses
- Has 2 broad markets: resource market and product market
B. Resource Market: Place where resources or services of resource suppliers are bought and
sold; households sell resources and businesses demand them
- Businesses need the resources to make their goods
C. Product Market: The place where goods and services produced by businesses are bought
and sold; households use the income they have gotten from sale of resources to buy goods
and services
D. Circular Flow Model: Complex interrelated web of decision making and economic activity
- Businesses buy resources and sell products; households buy products and sell resources
- Simultaneous and repetitive money flow of income and consumption expenditures
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