4th (autumn) trimester
2005-2006 acad. year
Lecture 1, Topic 1b (abstract)
Lecture 1 (abstract)
Topic 1b.
ESSENCE OF THE ECONOMIZING PROBLEM
The [dual] economizing problem for all countries of the World and for all times:


Infinite needs of the humankind
Finite resources to satisfy those needs
UTILITY – pleasure gained from a good (physical item or a service).
Products of labor (goods, services) classified by need:
 Basic necessities, goods needed every day
 Luxury goods
NEED: a state or condition in which something is necessary or desired for the life maintenance, as
well as for satisfaction of cultural and social development of a human being.
CLASSIFICATION OF NEEDS:
By urgency and significance: elementary needs, exquisite needs. OR NECESSITIES AND
LUXURIES
By nature: biological, cultural, social
By means required for the needs’ satisfaction: material, non-material.
By the group of simultaneous consumers: individual needs, group needs, national
needs.
Resources are scarce not by themselves, but in relation to infinite human needs
ECONOMIC RESOURCES = FACTORS OF PRODUCTION – are resources required for
production of goods and services
Material resources
1) LAND (natural resources)
2) CAPITAL (investment resources)
Human resources
3) LABOR
4) ENTREPRENEURIAL TALENT
Capital: investment goods, capital goods, produced for using in production of consumer goods.
Reward for resources applied
Resources
Income
LAND
CAPITAL
LABOR
ENTREPRENEURSHIP
economic rent
interest
wage (wage itself, bonuses, fringe benefits, etc.)
profit

CONSUMER GOODS directly meet the needs of people.
1
4th (autumn) trimester
2005-2006 acad. year
Lecture 1, Topic 1b (abstract)

INVESTMENT GOODS are used in the course of production of consumer goods and
thus they indirectly meet human needs.
Jean-Batiste Say: Theory of three factors
Prerequisites of an efficient use of the scarce resources:


FULL EMPLOYMENT – usage of all available [and appropriate] resources
FULL PRODUCTION – ensuring allocative and productive efficiency
FULL EMPLOYMENT
ALLOCATIVE EFFICIENCY
(effective allocation of resources)
MAXIMAL POSSIBLE AMOUNT
OF PRODUCTION
PRODUCTIVE EFFICENCY (at lowest cost)
MAXIMAL SATISFACTION
OF CONSUMERS
DISTRIBUTIONAL EFFICIENCY
(Optimal distribution of the consumer goods)
EFFICIENCY: the best utilization of resources.
Economic efficiency is “the state of an economy in which no one can be made better off
without someone being made worse off” (Bannock’s Dict-ry of Ec-cs) – Pareto optimality
Key economic problems any nation faces:
1.) What to produce?
2.) How to produce?
3.) For whom to produce?
Assumptions needed for plotting a production possibilities curve/frontier:
1.) The economy produces only two kinds of products;
2.) The economy works under conditions of full employment and maximal prodctive
efficiency, thus reaching maximal output;
3.) The economy utilizes a set of fixed resources suitable for both products;
4.) Level of technology remains unchanged (so far…).
Example of a production
possibilities frontier (PPF)
35
30
30
Salo (thous. tons)
28
26
25
24
20
18
16
15
10
10
5
0
0
0
1
2
3
4
Computers (thous. units)
2
5
6
4th (autumn) trimester
2005-2006 acad. year
Lecture 1, Topic 1b (abstract)
Production possibilities of salo and computers with full employment and production efficiency
in a hypothetic country U
Alternative opportunities
Computers, thous. units
Salo (lard), thous. tons
A
0
30
B
1
28
C
2
24
D
3
18
E
4
10
F
0
5
Economic (allocative) efficiency is reached if and when there is no possibility to increase in the
output of one product without a decrease in that of another.
The more we want to produce one product, the more we have to forgo production of another.
Imporvements in computer production
technologies
40
35
30
30
29
28
26
24
25
Salo, thous. tons
Salo (lard), thous.tons
30
22
20
18
16
15
10
10
9
Improvements in production
technologies of both products and/or
increase in the amount of resources
35
35
30
30
33
30
28
25
25
24
20
18
18
15
10
10
10
5
5
0
0
0
1
2
3
4
5
0
0
0
0
6
1
2
3
4
5
0
6
Computers, thous. units
Computers, thous. units
OPPORTUNITY COST (альтернативна вартість, вартість найкращої з втрачених
можливостей) – the largest quantity of the most desirable good we have to forgo in order to obtain a
a unit of particular good. An opportunity cost of any option is the best of forgone opportunities.
THE LAW OF INCREASE IN OPPORTUNITY COST1:
With an increase in the amount of a product output, the opportunity cost of each next
unit increases.
ECONOMIC GROWTH: Ability of an economy to produce more and more products due to
the technical progress and increase in the amount of resources.
Factors of economic growth:
 Increase in the quantity and quality of resources (natural, investment, human)
 Technical progress
 Expanding foreign trade
Factors hampering economic growth:
 Wars
 Discrimination
 Expanding foreign trade (!?)
******************************************************
1
Or: “The law of increasing opportunity cost” (McConnell, Brue)
3