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
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2. Products are sometimes classified as luxuries or
necessities, but the division is subjective. 3. Services satisfy
wants as well as goods. 4. Businesses and governments also have
wants. 5. Over time, wants change and multiply. 3
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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.Land (natural resources), 4
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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). 5
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d. Entrepreneur: a special kind of human resource that provides
four important functions: i. 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 6
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RESOURCE PAYMENTS Rent or Rental Income Interest Income WAGES
PROFIT & LOSS PROPERTY RESOURCES LAND CAPITAL HUMAN RESOURCES
LABOR ENTREPRENEUR 7
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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 for example... PIZZA A Consumer Good
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PRODUCTION POSSIBILITIES Robots A Capital Good 10
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PIZZA01234 (in hundred thousands) ROBOTS109740 (in thousands)
in table form PRODUCTION POSSIBILITIES 12
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PIZZA01234 (in hundred thousands) ROBOTS109740 (in thousands)
in table form graphical form Robots (thousands) Pizzas (hundred
thousands) PRODUCTION POSSIBILITIES 13
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PIZZA01234 (in hundred thousands) ROBOTS109740 (in thousands)
in table form graphical form Robots (thousands) Pizzas (hundred
thousands) PRODUCTION POSSIBILITIES 14
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PIZZA01234 (in hundred thousands) ROBOTS109740 (in thousands)
in table form graphical form Robots (thousands) Pizzas (hundred
thousands) PRODUCTION POSSIBILITIES 15
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PIZZA01234 (in hundred thousands) ROBOTS109740 (in thousands)
in table form graphical form Robots (thousands) Pizzas (hundred
thousands) PRODUCTION POSSIBILITIES 16
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PIZZA01234 (in hundred thousands) ROBOTS109740 (in thousands)
in table form graphical form Robots (thousands) Pizzas (hundred
thousands) PRODUCTION POSSIBILITIES 17
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PIZZA01234 (in hundred thousands) ROBOTS109740 (in thousands)
in table form graphical form Robots (thousands) Pizzas (hundred
thousands) PRODUCTION POSSIBILITIES 18
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At any point in time, a full-employment, full- production
economy must sacrifice some of product X to obtain more of product
Y. PRODUCTION POSSIBILITIES Limited Resources means a limited
output... 19
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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. 20
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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
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Q Q Robots (thousands) Pizzas (hundred thousands) 14 13 12 11
10 9 8 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8 A B C D E W Attainable but
Inefficient Unattainable Attainable & Efficient PRODUCTION
POSSIBILITIES 22
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Q Q Robots (thousands) Pizzas (hundred thousands) 14 13 12 11
10 9 8 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8 A B C D E W Attainable but
Inefficient Unattainable Attainable & Efficient PRODUCTION
POSSIBILITIES Notes... The amount of other products that must be
forgone or sacrificed to obtain 1 unit of a specific product is
called the opportunity cost of that good. LAW OF INCREASING
OPPORTUNITY COSTS 23
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Q Q Robots (thousands) Pizzas (hundred thousands) 1413121110 9
8 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8 1 2 3 4 5 6 7 8 A B C D E W
Attainable but Inefficient Unattainable Attainable & Efficient
PRODUCTION POSSIBILITIES Notes... LAW OF INCREASING OPPORTUNITY
COSTS A graph of the production possibilities curve will be CONCAVE
- bowed out from the origin. Economic resources are not completely
adapt- able to other uses. 24
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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. 25
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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? 26
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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. 27
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Q Q Robots (thousands) Pizzas (hundred thousands) 14 13 12 11
10 9 8 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8 U Unemployment &
Underemployment Shown by Point U More of either or both is possible
PRODUCTION POSSIBILITIES 28
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Q Q Robots (thousands) Pizzas (hundred thousands) 14 13 12 11
10 9 8 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8 U Unemployment &
Underemployment Shown by Point U More of either or both is possible
PRODUCTION POSSIBILITIES Notes... Economic Growth The ability to
produce a larger total output - a rightward shift of the production
possibilities curve caused by... 29
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Q Q Robots (thousands) Pizzas (hundred thousands) 14 13 12 11
10 9 8 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8 U Unemployment &
Underemployment Shown by Point U More of either or both is possible
PRODUCTION POSSIBILITIES Notes... Economic Growth 1 Increase in
resource supplies 2 Better resource quality 3 Technological
advances 30
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Economic Growth Q Q Robots (thousands) Pizzas (hundred
thousands) 14 13 12 11 10 9 8 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8 A B C D
E PRODUCTION POSSIBILITIES 31
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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. 32
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Two Examples of Economic Growth ALTA - FAVORS PRESENT GOODS
Goods for the Present Goods for the Future CURRENT CURVE FUTURE
CURVE CONSUMPTION PRODUCTION POSSIBILITIES Alta 33
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Two Examples of Economic Growth ALTA - FAVORS PRESENT GOODS
ZORN - FAVORS FUTURE GOODS Goods for the Present Goods for the
Future CURRENT CURVE FUTURE CURVE CONSUMPTION Goods for the Present
Goods for the Future FUTURE CURVE CONSUMPTION CURRENT CURVE
PRODUCTION POSSIBILITIES Alta Zorn 34
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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.There is
private ownership of resources. 2.Markets and prices coordinate and
direct economic activity. 3.Each participant acts in his or her own
self-interest. 4.In pure capitalism the government plays a very
limited role. 35
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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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