The

Economizing
Problem

1
The Foundation of Economics
 Society has virtually
unlimited wants . . .

2
The Foundation of Economics
 Society has virtually
unlimited wants . . .

 But limited or scarce

productive resources

3
The Foundation of Economics
 Society has virtually
unlimited wants . . .

 But limited or scarce

productive resources

4
Goods and services provide
UTILITY

LUXURIES VS NECESSITIES

5
Scarce resources
Economic resources/Factors of production

6
Scarce resources
Economic resources/Factors of production
 Property resources

7
Scarce resources
Economic resources/Factors of production
 Property resources

 Land

8
Scarce resources
Economic resources/Factors of production
 Property resources

 Land
 Capital

9
Scarce resources
Economic resources/Factors of production
 Property resources
 Land

 Capital

 Human resources
 Labor

10
Scarce resources
Economic resources/Factors of production
 Property resources
 Land

 Capital

 Human resources
 Labor

 Entrepreneurial ability

11
Scarce resources
Entrepreneurial ability
 Takes initiative
 Makes policy decisions
 Innovator
 Risk-bearer

12
Resource Payments
Economic resources/Factors of production
 Property resources

 Land Rent/Rental Income

 Capital Interest/Interest Income
 Human resources
 Labor Salary/Wages
 Entrepreneur Profit/loss

13
Economics:
Employment & Efficiency
 Full employment
Using available resources

 Full Production
Using resources efficiently
 Productive efficiency – least costly
 Allocative efficiency - most desired by society
14
Production Possibilities Frontier
Definition:
 The production possibility frontier (PPF)

is a curve that is used to discover the

mix of products that will use available
resources most efficiently.

15
Production Possibilities Frontier
Assumptions:
 Full employment and productive

efficiency
 Fixed resources

 Fixed technology

 Two goods/products

16
Production Possibilities Frontier
 Two products
 consumer good

17
Production Possibilities Frontier
 Two products
 consumer good
 capital good

18
 Production Possibilities
A limited resources means a limited output
… at any point in time, a full
employment, full production economy
must sacrifice some of product X
(Food, a consumer good)
to obtain more of product Y
(Machine, a capital good) …
19
Production Possibilities
What if we could only produce
10 units of capital good or 400 units
of consumer good?

20
 Production Possibilities
In table form In graphical form
Consumer Capital 10
Good Good
(Food) (Machine) 8
0 10 6
100 9
4
200 7
2
300 4
0
400 0

0 100 200 300 400

21
 Production Possibilities
In table form In graphical form
Consumer Capital 10
Good Good
(Food) (Machine) 8
0 10 6
100 9
4
200 7
2
300 4
0
400 0

0 100 200 300 400

22
 Production Possibilities
In table form In graphical form
Consumer Capital 10
Good Good
(Food) (Machine) 8
0 10 6
100 9
4
200 7
2
300 4
0
400 0

0 100 200 300 400

23
 Production Possibilities
In table form In graphical form
Consumer Capital 10
Good Good
(Food) (Machine) 8
0 10 6
100 9
4
200 7
2
300 4
0
400 0

0 100 200 300 400

24
 Production Possibilities
In table form In graphical form
Consumer Capital 10
Good Good
(Food) (Machine) 8
0 10 6
100 9
4
200 7
2
300 4
0
400 0

0 100 200 300 400

25
 Production Possibilities
In table form In graphical form
Consumer Capital 10
Good Good Production
(Food) (Machine) 8 possibilities
curve
0 10 6
100 9
4
200 7
2
300 4
0
400 0

0 100 200 300 400

26
Production Possibilities
11
A
10 B
9
8 Attainable
C
7 and
Machine

6 Efficient
5 D
4
3
2
1
E
0
0 100 200 300 400
Food
27
Production Possibilities
11
A
10 B
9
8 C
7
Machine

6
Attainable
5 D
but
4
3 Inefficient
2
1
E
0
0 100 200 300 400
Food
28
Production Possibilities
11
A W
10 B
Unattainable
9
8 C
7
Machine

6
5 D
4
3
2
1
E
0
0 100 200 300 400
Food
29
Production Possibilities
11
A W
10 B Unattainable
9
8 Attainable
C
7 and
Machine

6 Efficient
Attainable
5 D
but
4
3 Inefficient
2
1
E
0
0 100 200 300 400
Food
30
Production Possibilities
Why is the production possibilities
curve bowed out from the origin?

31
The law of increasing opportunity cost

…states that the amount of other

products that must be foregone or sacrificed
to obtain one unit of a specific product is
called the opportunity cost of that good
… a graph of the production possibilities
curve is concave

32
The law of increasing opportunity cost
11
A
10 B
9
8 C
7
Machine

6
5 D
4
3
2
1
E
0
0 100 200 300 400
Food
33
Production Possibilities
11
A
10 B Unemployment and
9 Underemployment is
8 shown by point U
C
7
Machine

6
5 U D
4
3
2
1
E
0
0 100 200 300 400
Food
34
Production Possibilities
Economic Growth
…the ability to produce a larger total output
–

35
Production Possibilities
Economic Growth
…the ability to produce a larger total output
–
a rightward shift of the production
possibilities curve is caused by

36
Production Possibilities
Economic Growth
…the ability to produce a larger total output
–
a rightward shift of the production
possibilities curve is caused by
 Increases in resources

37
Production Possibilities
Economic Growth
…the ability to produce a larger total output
–
a rightward shift of the production
possibilities curve is caused by
 Increases in resources

 Better resource quality

38
Production Possibilities
Economic Growth
…the ability to produce a larger total output
–
a rightward shift of the production
possibilities curve is caused by
 Increases in resources

 Better resource quality

 Technological advances
39
Production Possibilities
11
A
10 B
9
8 C
7
Machine

6
5 D
4
3
2
1
E
0
0 100 200 300 400
Food
40
Production Possibilities
A’
11 B’
10
A
B
Economic
C’
9 Growth
8 C
7
Machine

6 D’
5 D
4
3
2
1
E E’
0
0 100 200 300 400
Food
41
Production Possibilities
 Two examples of economic growth
Favoring present goods
Goods for the future

Current curve
Future curve

consumption

Goods for the present

42
Production Possibilities
 Two examples of economic growth
Favoring future goods
consumption
Goods for the future

Future curve

Current curve

Goods for the present

43
The Circular Flow Model

Business Firm Household

44
The Circular Flow Model

Resource Market

Business Firm Household

Product Market

45
The Circular Flow Model
Resource Market
•Household sell

Business Firm Household

• Buys resources • Sells resources

Product Market

46
The Circular Flow Model
Resource Market
•Households sell
•Businesses buy

Business Firm Household

• Buy resources • Sell resources

Product Market

47
The Circular Flow Model
Resource Market
• Households sell
• Businesses buy

Business Firm
• Buy resources Household
• Sell products • Sell resources
• Buy products

Product Market
• Businesses sell

48
The Circular Flow Model
Resource Market
• Households sell
• Businesses buy

Business Firm Household

• Sell resources
• Buy resources
• Buy products
• Sell products

Product Market
• Businesses sell
• Households buy

49
The Circular Flow Model
Resource Market
• Businesses buy
• Households sell

Business Firm Household

• Sell resources
• Buy resources
• Buy products
• Sell products

Product Market
• Businesses sell
• Households buy

50