CHAPTER 2 notes - The Economizing Problem CHAPTER TWO THE...

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The Economizing Problem CHAPTER TWO THE ECONOMIZING PROBLEM CHAPTER OVERVIEW 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. Some 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. The circular flow model is introduced to provide an overview of the way a market system operates. 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. 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. 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. B. Scarce resources (the second fundamental fact): 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. 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, 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 20
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The Economizing Problem a. Rent and interest to suppliers of property resources b. Wages and salaries to labor resources c. Profits to entrepreneurs 4. Quantities of resources are limited relative to the total amount of goods and services desired.
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