The Economizing Problem
THE ECONOMIZING PROBLEM
This crucial chapter introduces students to a number of important concepts. The first part of the chapter
stresses the economizing problem, which results because we have unlimited wants but limited resources.
A discussion of full employment and efficiency follows.
Both productive and allocative efficiency are
defined and emphasized as desirable goals.
The production possibilities curve model is introduced to
illustrate these important concepts.
Using this model, the concepts of opportunity costs and increasing
opportunity costs, unemployment, growth, and present versus future possibilities are all demonstrated.
Additional emphasis is placed on allocative efficiency, which is a concept new to most students.
real-world applications of the production possibilities idea are presented.
The chapter concludes by discussing how market and command economic systems differ, concentrating
on who owns the factors of production and the method used to coordinate economic activity.
circular flow model is introduced to provide an overview of the way a market system operates.
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):
Economic wants are desires of people to use goods and services that provide utility,
which, as introduced in chapter 1, means pleasure, happiness, or satisfaction.
Products are sometimes classified as luxuries or necessities, but the division is subjective.
Services satisfy wants as well as goods.
Businesses and governments also have wants.
Over time, wants change and multiply.
Scarce resources (the second fundamental fact):
Economic resources are limited relative to wants.
Economic resources are sometimes called factors of production and include four
Land or natural resources,
Capital or investment goods which are all manufactured aids to production like tools,
equipment, factories, transportation, etc.,
Labor or human resources, which include physical and mental abilities used in
Entrepreneurial ability, a special kind of human resource that provides four important
Combines resources needed for production
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
Resource payments correspond to resource categories