The Economizing Problem

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The Economizing Problem
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THE FOUNDATION OF ECONOMICS
SOCIETY HAS VIRTUALLY UNLIMITED WANTS...
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GOODS SERVICES PROVIDE...
UTILITY
The ability of a product to satisfy a need or
want.
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GOODS SERVICES PROVIDE...
UTILITY
LUXURIES (Wants)
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GOODS SERVICES PROVIDE...
UTILITY
LUXURIES vs. NECESSITIES (Wants) (Needs)
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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
CAPITAL
HUMAN RESOURCES
LABOR
ENTREPRENEURIAL ABILITY
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ENTREPRENEURIAL ABILITY
Takes The Initiative
Makes Policy Decisions
Innovator (Clarence Crane)
The Risk Bearer
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RESOURCE PAYMENTS
RENT
INTEREST
WAGES
PROFIT LOSS
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ECONOMICS EFFICIENCY
Full Employment
Full Production
Full Production implies
Productive Efficiency
Allocative Efficiency
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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...
Full Employment Productive Efficiency
Fixed Resources
Fixed Technology
Two Products
for example...
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PRODUCTION POSSIBILITIES
A Capital Good
Assumes...
Full Employment Productive Efficiency
Fixed Resources
Fixed Technology
Two Products
for example...
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PRODUCTION POSSIBILITIES
What if we could only produce ...
10,000 Tanks
or
400,000 Cars
Using all of our resources, to get some cars, we
must give up some tanks!
for example...
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PRODUCTION POSSIBILITIES
in table form
Cars 0 1 2 3 4 (in hundred thousands)
Tanks 10 9 7 4 0 (in thousands)
graphical form
Tanks (thousands)
Cars (hundred thousands)
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PRODUCTION POSSIBILITIES
in table form
Cars 0 1 2 3 4 (in hundred thousands)
Tanks 10 9 7 4 0 (in thousands)
graphical form
Production Possibilities Frontier
Tanks (thousands)
Cars (hundred thousands)
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PRODUCTION POSSIBILITIES
Limited Resources means a limited output...
At any point in time, a full-employment,
full-production economy must sacrifice some of
product X to obtain more of product Y.
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PRODUCTION POSSIBILITIES
Q
14 13 12 11 10 9 8 7 6 5 4 3 2 1
Unattainable
A
B
C
W
Attainable Efficient
Tanks (thousands)
D
Attainable but Inefficient
E
Q
1 2 3 4 5 6
7 8
Cars (hundred thousands)
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PRODUCTION POSSIBILITIES
Q
14 13 12 11 10 9 8 7 6 5 4 3 2 1
Unattainable
A
B
C
W
Attainable Efficient
Tanks (thousands)
D
Attainable but Inefficient
E
Q
1 2 3 4 5 6
7 8
Cars (hundred thousands)
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PRODUCTION POSSIBILITIES
Q
14 13 12 11 10 9 8 7 6 5 4 3 2 1
A
B
C
Tanks (thousands)
D
E
Q
1 2 3 4 5 6
7 8
Cars (hundred thousands)
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PRODUCTION POSSIBILITIES
Q
14 13 12 11 10 9 8 7 6 5 4 3 2 1
Unattainable
A
B
C
W
Attainable Efficient
Tanks (thousands)
D
Attainable but Inefficient
E
Q
1 2 3 4 5 6
7 8
Cars (hundred thousands)
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PRODUCTION POSSIBILITIES
Unemployment Underemployment Shown by Point U
More of either or both is possible
U
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PRODUCTION POSSIBILITIES
Unemployment Underemployment Shown by Point U
The ability to produce a larger total output - a
rightward shift of the production possibilities
curve caused by...
More of either or both is possible
U
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PRODUCTION POSSIBILITIES
Unemployment Underemployment Shown by Point U
1 - Increases in resources - 2 - Better
resource quality - 3 Technological advances
More of either or both is possible
U
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PRODUCTION POSSIBILITIES
Q
A
14 13 12 11 10 9 8 7 6 5 4 3 2 1
Economic Growth
B
C
Tanks (thousands)
D
E
Q
1 2 3 4 5 6
7 8
Cars (hundred thousands)
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ALLOCATIVE EFFICIENCY MB MC
MC
Marginal Benefit and Marginal Cost
MB
1 2 3 4 5
Quantity of Tanks (thousands)
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ECONOMIC SYSTEMS
THE MARKET SYSTEM Pure Capitalism
Laissez-faire THE COMMAND SYSTEM Socialism C
ommunism
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CIRCULAR FLOW MODEL
COSTS
INCOMES
RESOURCE MARKET
RESOURCES
INPUTS
BUSINESSES
HOUSEHOLDS
GOODS SERVICES
GOODS SERVICES
PRODUCT MARKET
CONSUMPTION
REVENUE