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MICROECONOMICS: CHAPTER TWO
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The Economic Problem: Scarcity, Wants, and Choices.
THE ECONOMIC PROBLEM
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Society's Wants are virtually unlimited.
The resources for producing the goods and services to satisfy
society's wants are limited or scarce.
This means that economic choices are necessary.
UTILITY AND WANTS
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What are wants? The desires of consumers to obtain and use
various goods and services that provide “utility”
Utility: The pleasure or satisfaction derived from something.
These can be biological, social, etc.
Our desire for one good may be satisified, but in general, our
demand for goods and services are insatiable.
SCARCE RESOURCES
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Economic Resources: The land, labour, capital, and
entrepreneurial ability that are used in the production of goods
and services.
LAND
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Land: All natural resources, not just property. Includes mineral
deposits, oil, trees, etc. Canada profits a great deal from
exploiting this category.
Payments are Rents
Easter Island did not have enough “land,” and the economy
collapsed.
LABOUR & CAPITAL.
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Labour: all the physical and mental talents of individuals
available to produce goods and services. Increased education
might increase this category, as might immigration. Why?
Payments = Wages.
Capital: Human-made resources, such as: buildings, machinery,
equipment. Used to produce goods and services. Pizza Hut
would need a pizza oven, tables, etc.
Payments = Interest
ENTREPRENEURIAL ABILITY.
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Entrepreneurial Ability: The human resource that combines the
other resources to produce a product, make non-routine
decisions, innovate, and bear risks. How did the western world
come to dominate?
Payments = Profits
The entrepreneur:
INITIATES,
INNOVATES,
RISKS,
DECIDES.
FULL EMPLOYMENT
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Full employment is the use of all “available” resources to
produce want-satisfying goods and services.
An efficient economy produces as many goods and services as
possible with its available resources.
Full Employment alone cannot achieve maximum efficiency.
Why?
FULL PRODUCTION
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Full Production and Full Employment are required for
maximum efficiency.
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Full Production is the employment of available resources so
that the maximum amount of goods and services is produced.
Max wants satisfied.
Full Production requires both productive and allocative
efficiency.
PRODUCTIVE AND ALLOCATIVE EFFICIENCY
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Productive efficiency is the production of a good in the least
costly way. This leaves more resources to satisfy other wants.
Allocative efficiency is the apportionment of resources among
industries to obtain the production of the products most wanted
by consumers
PRODUCTION POSSIBILITIES MODEL / CURVE
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A production possibilities curve shows the different
combinations of goods and services that can be produced in a
full-employment, full-production economy where the available
supplies of resources and technology are fixed.
Society must choose which goods and services to produce and
which to forgo. There must be trade-offs
ASSUMPTIONS OF A PRODUCTION POSSIBILITIES
MODEL / CURVE
1. Full Employment and Productive Efficiency: employing all
available resources + is producing them at the least cost.
2. Fixed Resources: available supplies of factors of production are
fixed.
3. Fixed Technology: state of technology fixed, it implies a short
time period.
4. Two Goods: in this case, we are producing fish or tanks.
PRODUCTION POSSIBILITIES TABLE
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As we move along the production possibilities curve, we increase the
Production of Tanks at the expense of Fish, and vice versa.
An economy achieving full employment and productive efficiency
Must sacrifice some of one good to obtain another.
PRODUCTION POSSIBILITIES CURVE / FRONTIER
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The production possibilities curve is also known as a
production possibilities frontier because it shows the limit of
attainable outputs.
Points lying inside the curve are attainable, but not desired
because they mean that the economy could be satisfying more
wants if it was more efficient.
Points outside the curve are not attainable because we do not
have the current factors of production. How could we expand
the curve?
THE LAW OF INCREASING OPPORTUNITY COSTS
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Opportunity Cost is the amount of other products that must be
forgone or sacrificed to obtain a unit of another product or
service.
The Law of Increasing Opportunity Costs states that as the
production of a good increases, the opportunity cost of
producing an additional unit rises.
Key Graph Quiz on Page 33 (note the difference between
marginal and total opportunity cost).
SHAPES OF THE PRODUCTION POSSIBILITIES CURVE
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It is concave to the origin in our example due to the law of
increasing opportunity costs.
At the link below, there are a total of three curve types.
1. Increasing opportunity costs.
2. Constant opportunity costs.
3. Decreasing opportunity costs (specialization).
http://en.wikipedia.org/wiki/Production–
possibility_frontier#Shape
CHAPTER ASSIGNMENT QUESTIONS
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Page 47. Questions 1, 4, 5.