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chap02lecture notes - CHAPTER TWO THE ECONOMIZING PROBLEM...

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CHAPTER TWO THE ECONOMIZING PROBLEM INSTRUCTIONAL OBJECTIVES After completing this chapter, students should be able to: 1. Define the economizing problem, incorporating the relationship between limited resources and unlimited wants. 2. Identify types of economic resources and types of income associated with various factors. 3. Differentiate between full employment and full production. 4. Explain the concepts of allocative and productive efficiency and how they differ. 5. Construct a production possibilities curve when given appropriate data. 6. Illustrate economic growth, unemployment and underemployment of resources, allocative and productive efficiency, and increasing costs using a production possibilities curve. 7. Give examples of underallocation and overallocation of resources. 8. Give some real-world applications of the production possibilities concept. 9. Summarize the general relationship between investment and economic growth, 10. State two major differences between pure capitalism and a command economy. 11. Highlight the main features of pure capitalism, command economy, mixed and traditional systems. 12. Identify the major groups of decision makers and the major markets in a market system using the circular flow diagram. 13. Differentiate between product and resource markets. 14. Define and identify the terms and concepts listed at the end of the chapter. LECTURE NOTES I. The foundation of economics is the economizing problem: society’s material wants are unlimited while resources are limited or scarce. A. Unlimited wants (the first fundamental fact): 1. Material wants are desires of people to use goods and services that provide utility, which means satisfaction. 2. Products are sometimes classified as luxuries or necessities, but 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. B. Scarce resources (the second fundamental fact): 16
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The Economizing Problem 1. Economic resources are limited relative to wants. 2. Economic resources are sometimes called factors of production and include four categories: a. Land or natural resources, b. Labor or human resources, which include physical and mental abilities used in production, c. Capital or investment goods which are all manufactured aids to production like tools, equipment, factories, transportation, etc., d. Entrepreneurial ability, a special kind of human resource that provides four important functions: i. Combines resources needed for production, ii. Makes basic business policy decisions, iii. Is an innovator for new products, production techniques, organizational forms, iv. Bears the risk of time, effort, and funds. 3. Resource payments correspond to resource categories: a. Rent and interest to suppliers of property resources, b. Wages and salaries to labor resources, and c. Profits to entrepreneurs.
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