RESOURCE UTILIZATION AND ECONOMICS

1. Three Basic Economic Questions

2.The concept of Opportunity Cost and Trade Offs
3. Factors of Production
4. Circular Flow Model
5. Basic Decision Problems
6. Types of Economic System
7. Important Economic Terms

3 Basic Economic Problems

1. What goods and services should be produced and in what quantities?
2. How should these goods and services be produced?
3. For whom should these goods and services be produced?

The first problem deals with allocative efficiency. Allocative Efficiency refers to a condition in which the optimal amount of output is
produced given the underlying structure of social benefits and costs. In reality, it is not always possible to produce all the goods and
services that people want because resources are limited. Therefore there is really a need evaluate our needs and study the opportunity
cost.
Opportunity cost are cost foregone.

What to produce?
– With limited resources, deciding what is needed the most is often a factor in determining what will be produced. What isthe need or
want of this product?
– What is the point of making a product that no one is going to buy. Businesses need to make money…so they choose products that
people want.

Opportunity Cost
• The true cost of choosing one alternative over the other.
– Trade offs – giving up one thing in order to obtain another.
• The one that you give up when the choice is made.
“Opportunity cost is the opportunity lost”

Give an example of a time when you had to make an economic choice. What was the opportunity cost?
College Vs. Work
• What are your plan after this semester?
– Cont. College or work
• What factors did you consider when making this decision?
– money now or money later
– Family
• How will this decision impact your future?
• What are the trade offs of this decision?
Opportunity cost?
Opportunity cost is normally expressed in relative price
• Ex. You have P20.00 pesos in your pocket, If the price of Pepsi Cola in Can is P20.00 and one piece of banana in stick is P10.00. If you
chooses to buy the can of soda then we can say that opportunity cost of that can of soda is 2 pieces of banana in stick, assuming that the
bananas were the next best alternative
basic problem focused on How much to produced?
- How much g/s needed to produce in order to answer the demand of man and society?
 Underproduction (shortage) results to failure to meet the needs and wants of the society.
 Overproduction ( surplus) excess g/s going to waste

The second economic problem deals with production efficiency. Production efficiency refers to a condition in which one activity either
production or consumption cannot be increased without the reduction on another activity because the maximum number of output is
produced from a finite amount of inputs.
How should it be produced?
– Technology, labor, capital, etc.
– getting the lowest cost to make the product.
– Are we going to make the product from scratch or will a machine be making the product.
• What will each option cost?
– Will having new technology allow us to lower our expenses?
The third economic problem deals with the problem of distribution. In this economic question, we tend to answer the question, ‘Who
should consume the produced goods and services?” Also we should answer what is the basis of rationing the said final produced product
to the different consumers. It asks whether produced output is equitably or fairly distributed to everyone in the society.
Whom should it be produced for?
– Who is going to use this product?
• Did Apple market the ipod to the large population of elderly people in the U.S. or the youth? Why?
– Most goods and services are distributed to individuals through a price system. (How to distribute the g/s?)
• If you want it and can afford to buy it…you will.
– Products can also be distributed through other means; force, first come, lottery, majority, etc..
If we are going to closely analyze the 3 basic economic problems, these merely focus on the limited nature of resources.

RESOURCES
Factors of production- Inputs used in the production of goods and services
• Natural resources (Land)– “free gifts of nature”
– Land, minerals, oil, forests, air, and timber
• Capital Resources – “manufactured aids to production”
– Tools, machines, equipment, factories
– Things used in producing goods and services and getting them to consumers.
• Human Resources (Labor)– “mankind’s physical and mental talent”
– These are the skills people have that are used to produce goods and services.
• Entrepreneur – the individual who combines the factors of production in order to produce a good or service.
– Risk taker, policy maker, and innovator
Factors of production:
I. Land – Rent
II. Labor – Wage/salary
III. Capital – Interest
IV. Intrepreneurship – profit
In the following example, these four factors of production can be seen at work.
Patients with cardiac pathology normally go the hospital to see cardiologist (land and capital). Usually, in practice we ask for an
appointment from a receptionist (labor) before the cardiologist (enterprise, labor) could look for the patients’ complaints, he might use
medical instrument such as stethoscope (capital) to listen to the heart beat before prescribing medication (land, labor, capital,
entrepreneur) to treat a specific disease.
In Economics: Money is not actually considered as capital as it does not produced good or service but it is rather a form of asset that is
mainly used as a medium of exchange.

Is Money considered as capitalresource ?

This question is technical in nature… (financial resource… it is a means of acquiring wealth or a way of measuring wealth) Circular flow
of income and output
Below are some decision problems that households, firms, government and society must think in order to properly manage their
resources
A.Consumption - Members of the society, with their individual wants, determine what types of goods/ services they want to
consume, and the corresponding amount thereof that they should purchase and utilize. Consumption is the basic decision problem that
the consumers must deal with their day to day activities.
B. Production- the problem of production normally the concerns of the producers. The determine the needs, wants and demands of
consumers and decide how to allocate their resources to meet these demands. G/S may be produced by different methods of
production, depending on the technological state of the business and available resources in the society.
C. Distribution – This problem is primarily addressed by the government. There must be proper allocation of all resources for the benefit
of the whole society. In market economy, absolute equality of every member, as to distribution of resources, can never be achieved.
D. Growth over time – This is the problem that the society or nation must deal with. Societies must continue to live on. They
also grow in numbers. On the one hand, people have definite lives, but societies have longer. All the problems of choice, consumption,
production and distribution have to be seen in the context of how they will affect the future events.

Types of Economic System

(to address economic problems)
1. Traditional Economy
 basically a subsistence economy. A family produce goods only for its own consumption. The decisions on what, how, how much
and for whom to produce are made by the head of the family, in accordance with the traditional means.

Characteristics of this economy:

a. Communal land ownership
b. New technologies are not welcome since they contrast with the traditional practices of their ancestors
c. The economy is only its third priority while culture and religion are its foremost priorities; and
d. Mines are used to gather raw materials for production

2. Command Economy
The manner of production is dictated by the government. The government decides on what, how , how much and for whom to produce.
It is an economic system characterized by collective ownership of most resources, and the existence of central planning agency of the
state. In this system, all productive enterprises are owned by the people and administered by the state.

3. Market economy
The basic characteristic of this economy is that the resources are privately owned and the people themselves make the decisions. Factors
of production are owned and manage by individuals, and people are free to produced g/s to meet the demand of consumers, who, in
turn, are also free to choose goods according to their own likes. This is also called the laissez- faire economy.
4. Mixed economy
This economy is the mixture of traditional, market and command economy.
Characteristics of this economy:
a. The means of production are owned and controlled by private sector as well as the government
b. The people decide on economic activities within the economy
c. The problem of distribution of g/s and allocation of economic resources are determined through combination of the market system
and governmental laws and policies.

Some Countries under various economic system:

Mixed economy
1. USA
2. Sweden
3. Philippines
4. Japan
Market Economy
1. Singapore
2. Hongkong
3. China
Command Economy
1. North Korea
2. Cuba
Traditional Economy
1. Mongolia
2. Afganistan

What is the best way to allocate resources?

1. Efficiency, making the optimal or best use of the resources. It was named after Vilfredo Pareto, an Italian economist who used the
concept in his studies of economic efficiency and distribution. Hence, economic efficiency of resources occurs when the society is using
its scarce resources to produce the highest possible quantity of goods and services that consumers wanted to buy.

There are two parts of economic efficiency:

I. productive efficiency
II. allocative efficiency.

Productive efficiency when using the least amount of resources to produce certain g/s at the lowest possible cost. While, allocative
efficiency is a condition in which the optimal amount of output is produced given the underlying structure of social benefits and costs.
Allocative efficiency is manifested in health if there are no resources being wasted. In this case ,the quantity and type of g/s wanted by
the society is the same as quantity and type produced.

Pareto efficiency or allocation of resources is said to be efficient if it is impossible to change that allocation to make one person better
off without making someone else worse off. This can be achieved when it is not possible to produce more of one good or service without
producing less of another good or service.
2. Equity, the term refers to the actions, treatment of others, or a general condition characterized by justice, fairness and impartiality.
Equity is a normative issue (based from the judgment and values of the people).
There are two categories of equity:
I. Horizontal and
II. vertical
 Horizontal equity is concerned with the equal treatment of equal need.
 Vertical equity is concerned with the extent to which individuals who are unequal should be treated differently.

IMPORTANT TERMS:
 Needs
- are states of self deprivation felt by humans. It stand for Natural Essential Elements Designed for Survival. Anything required to
survive is said to be a need. Wants are form of human needs shaped by culture and individual preferences. These pertain to the
preferences of people regarding their survival requirement.
 Demands
- are simply needs and wants that are backed up by consumer purchasing power. No matter how strong the need or want for g/s,
if they don’t have the money to buy such, marketers normally will not make the product available.
 Wealth
- refers to anything that has functional value (usually in money), which can be traded for goods or services.
 Consumption
- refers to direct utilization or usage of available resource
 Production
- is defined as formation or creation by firms of an output. It is basically the process by which land, labor and capital are
combined in order to produce outputs of g/s.
 Exchange
- is the process of trading or buying and selling g/s for money or its equivalent.
 Distribution
- is the process of allocating or apportioning scarce resources to be utilized by the household, the business sector and the rest of
the world. However, in specific term, it refers to the process of storing and moving products to customers often through
intermediaries such as wholesalers or retailers.