1. The Problem Unlimited wants the 1st fundamental fact
Economic wants are the desires of people to use g/s that provide utility (satisfaction)
Luxury and necessities
This applies to all economic actors in an economy
Wants change and increase over time

2. The Problem cont. Scarce Resources the 2nd fundamental fact
Resources are limited relative to wants
Resources are also known as factors of production:
LAND OR NATURAL RESOURCES
CAPITAL OR INVESTMENT GOODS
LABOR OR HUMAN RESOURCES
ENTREPRENURIAL ABILITY

3. THE Problem cont. Payments for resources correspond to the category
Rent and interest to suppliers of property resources (land and capital respectively)
Wages and salaries to labor resources
Profits to entrepreneurs
REMEMBER: quantities of resources are limited relative to the total amount of g/s desired

4. Employment and Efficiency
Employment defined for this example: the use of resources for a specific purpose. Full employment in this sense is defined as the use of all available resources
Full production is defined as the maximum production of g/s to satisfy economic wants
Together these two equate to EFFICIENCY

5. Two Kind of Efficiency Implied
Full Production can imply 2 efficiencies
Productive Efficiency: the least costly method of production is used to produce g/s
Allocative Efficiency: resources are used to create those g/s most wanted by society in whatever combination

6. Production Possibilities Table and Curve
Assumptions of table and curve:
Economy is operating efficiently (full production and full employment)
Available resources are fixed in quantity an quality at this particular point in time
Technology is constant
Economy produces only TWO types of products

7. Production Possibilities cont.
Production Possibilities Table illustrates possible choices
A PPC is a graphical representation of those choices
Points on the curve =maximum production of the two products in this economy
Points inside the curve = underemployment of resourcess
Points outside the curve = unattainable production given current restraints on production

8. Where should an economy produce?
The Optimal or best product mix will be at some point on the curve.
The exact point depends on the society. This is a normative decision.

9. Opportunity Costs and the PPC
All PPC’s indicate opportunity costs in the production of products.
Constant opportunity costs imply that resources are perfectly exchangeable
Most PPC are indicative of increasing opportunity costs

10. Law of Increasing Opportunity Costs
The amount of OTHER product that must be given up to obtain more of a given product is the opportunity cost. This is similar to the opportunity cost you incur in decision making.
Opportunity costs are measured in product not in money as price is not part of the PPC model

11. continued
The more of a product produced the greater its opportunity cost (marginality).
The slope of the PPC becomes steeper demonstrating increasing opportunity cost
Rationale for PPC: Resources are not completely adaptable to alternative uses
Some resources are better suited to production of some goods than others.

12. Allocative Efficiency
How do societies determine the optimal point of production?
If the MB of the product exceeds its MC than society will most likely agree to further production of this product
The converse is also true
Marginal costs rise as more of a product is produced

13. continued Marginal benefits decline
To generalize: optimal production will take place where the MB is equal to the MC.

14. Types of Economic Systems
Traditional Capitalist/Market/Free Market Command/Socialist/Communist Mixed/Social Democratic/Corporate Capitalism

15. Simple Circular Flow Models
Flow models help us to understand the movement of the different parts of the economic system in capitalism.
These models can become extremely sophisticated as we will see in the latter part of the course.
Please be sure you UNDERSTAND THE FLOWS COMPLETELY.