1. The Economizing Problem part 1
Please listen to the audio as you work through the slides.

2. An Exercise in Connecting the Dots
Today, over 1 billion people in the world go hungry while over 1 billion people are overweight.
How do you explain this?

3. Connecting more dots
How do you explain the relationship between the previous problem and the 3 features of the economic way of thinking:
Scarcity and Choice
Rational behavior
Marginal analysis

4. The Economizing Problem part 1
Learning Objectives:
Students will thoroughly and completely explain:
The 4 basic input factors of production,
The individual’s economizing problem,
Society’s economizing problem.
The basic types of economic systems,
The circular flow model.

5. The Foundations of Economics
SOCIETY HAS VIRTUALLY
UNLIMITED WANTS...
The economic wants of citizens,
firms, and governments

6. The Foundations of Economics
SOCIETY HAS VIRTUALLY
UNLIMITED WANTS...
BUT LIMITED OR SCARCE
PRODUCTIVE RESOURCES!
The means of producing goods and services

7. Goods & Services Provide...
UTILITY
A measure of satisfaction or pleasure.

8. Goods & Services Provide…
UTILITY
Individuals want luxuries – goods and services

9. UTILITY Goods & Services Provide... As well as necessities
The objective of all economic activity
Is to fulfill wants.

10. Scarce Resources Types of Economic Resources PROPERTY RESOURCES
LAND - including ecosystem services

11. Scarce Resources Economic Resources Property Resources - LAND
- CAPITAL
Real Capital:
Equipment, tools, machinery, buildings -
Used to produce final goods!
Financial Capital: Funds available for acquiring real capital!

12. Scarce Resources Economic Resources Property Resources LAND CAPITAL
HUMAN RESOURCES

13. SCARCE RESOURCES ECONOMIC RESOURCES PROPERTY RESOURCES LAND CAPITAL
HUMAN RESOURCES
- LABOR – physical &
Mental talents of individuals,
Available and useable in the
production of goods and services

14. Entrepreneurial Ability
The Entrepreneur:
Takes the Initiative in combining resources
Makes Strategic Business Decisions that set the course of the business
Is an Innovator
The Risk Bearer – success is not guaranteed

15. Also known as the SCARCE RESOURCES Input Factors of Production
ECONOMIC RESOURCES
PROPERTY RESOURCES
Also known
as the
Input
Factors of
Production
LAND
CAPITAL
HUMAN RESOURCES
LABOR
ENTREPRENEURIAL ABILITY

16. Resource Payments PROPERTY RESOURCES LAND CAPITAL HUMAN RESOURCES
LABOR
ENTREPRENEUR
RENTAL
INCOME
INTEREST
INCOME
WAGES
PROFIT &
LOSS

17. The Individual’s Economizing Problem
Characteristics:
Limited income
Unlimited wants
A budget line – aka budget constraint
Tradeoffs & opportunity costs
Make best choice possible
What happens when there is a change in income?

18. Budget Line (constraint) for the Individual12 10 8 6 4 2
DVDs
$20
Books
$10 6 5 4 3 2 1 2 4 6 8 10 12
Income = $120
Pdvd = $20
= 6
Unattainable
Quantity of DVDs
Income = $120
Pb = $10
= 12
Attainable
Quantity of Paperback Books
1-18

19. Society’s Economizing Problem
Introducing the Production Possibility Model.
A Production Possibilities Model illustrates the tradeoffs and output that are possible given a limited amount of input.
It is important to understand because it can help display which options might allow a country to use their resources in the most efficient way possible.

20. Make sure you understand this:
Key Point:
Make sure you understand this:
To realize the best use of scarce resources,
A society must achieve both
full employment and full production!
What does this mean?

21. Key Concepts of the model
Full Employment – the use of all available resources. Be Careful here!
Full production – all employed resources are used so they provide the maximum satisfaction of our economic wants.
This implies two kinds of efficiency.
Productive Efficiency – Production of any particular mix of goods and services in the least cost way.
Allocative Efficiency – least cost production of the 1 set of outputs that society wants most.

22. The Production Possibilities model
Assumptions
Full Employment and Full Production
Fixed resources – in both quantity and quality
Fixed technology
Two Goods – a consumer good and a capital good

23. PIZZA Assumes... Full Employment and Productive Efficiency
Production Possibilities
Assumes...
A Consumer Good
Full Employment
and Productive
Efficiency
PIZZA
Fixed Resources
Fixed Technology
Two Goods
for example...

24. Assumes... Full Employment and Productive Efficiency Fixed Resources
Production Possibilities
A Capital Good
Assumes...
Full Employment
and Productive
Efficiency
Robots
Fixed Resources
Fixed Technology
Two Goods
for example...

25. for example... 10,000 Robots 400,000 Pizzas Production Possibilities
What if we could only produce ...
10,000 Robots or
400,000 Pizzas
Using all of our resources, to
get some more pizza, we must give
up some more robots!
for example...

26. in table form Production Possibilities PIZZA 0 1 2 3 4
(in hundred thousands)
ROBOTS
(in thousands)

27. Pizzas (hundred thousands)
Production Possibilities
in table form
PIZZA
(in hundred thousands)
ROBOTS
(in thousands)
graphical form
Robots
(thousands)
Pizzas (hundred thousands)

28. Pizzas (hundred thousands)
Production Possibilities
in table form
PIZZA
(in hundred thousands)
ROBOTS
(in thousands)
graphical form
Robots
(thousands)
Pizzas (hundred thousands)

29. Pizzas (hundred thousands)
Production Possibilities
in table form
PIZZA
(in hundred thousands)
ROBOTS
(in thousands)
graphical form
Robots
(thousands)
Pizzas (hundred thousands)

30. Pizzas (hundred thousands)
Production Possibilities
in table form
PIZZA
(in hundred thousands)
ROBOTS
(in thousands)
graphical form
Robots
(thousands)
Pizzas (hundred thousands)

31. Pizzas (hundred thousands)
Production Possibilities
in table form
PIZZA
(in hundred thousands)
ROBOTS
(in thousands)
graphical form
Robots
(thousands)
Pizzas (hundred thousands)

32. Limited Resources means a limited output...
Production Possibilities
Limited Resources means
a limited output...
At any point in time, a full-employment, full-production economy must sacrifice some of product X to obtain more of product Y.

33. Production PossibilitiesQ 14 13 12 11 10 9 8 7 6 5 4 3 2 1
Unattainable A B C W
Attainable
& Efficient
Note: Every point on the curve represents productive efficiency
Robots (thousands) D
Attainable
but
Inefficient E Q
Pizzas (hundred thousands)

34. Law of Increasing Opportunity Costs
The amount of other products that must be
forgone or sacrificed to obtain 1 unit of a
specific product is called the opportunity cost of that good.
The Law of Increasing Opportunity Costs says: that in order to produce more of one good, more of some other good must be sacrificed.

35. Production Possibilities* Q 14 13 12 11 10 9 8 7 6 5 4 3 2 1
Explain the Law of Increasing Opportunity Costs using the PPC. A B C
Robots (thousands) D
Attainable
but
Inefficient E Q
Pizzas (hundred thousands)

36. To find the point of allocative efficiency,
you can use Marginal analysis, which involves:
Comparing marginal benefits and marginal costs
Here’s how to think about marginal analysis:
Any economic activity should be expanded as long as Marginal benefits exceed Marginal costs.
The optimal amount of activity occurs at MB=MC
No resources beyond the MB=MC point should be allocated to the production of that good. In fact, you should reduce the use of resources until you get back to MB=MC.

37. Note: every point on the PPC consists of pizza – robot pairs!
Production Possibilities
Note: every point on the PPC consists of pizza – robot pairs! * Q 14 13 12 11 10 9 8 7 6 5 4 3 2 1
Where on the curve will the
Point of Allocative Efficiency be found? A B C
Here’s How to Figure it out!
Two Step Process:
Find the allocatively efficient quantity of Pizzas.
Then find the quantity of Robots that correspond to that quantity of Pizzas.
Robots (thousands) D
Attainable
but
Inefficient E Q
Pizzas (hundred thousands)

38. Allocative Efficiency: MB=MC
Production Possibilities
Allocative Efficiency: MB=MC P Q
Marginal Benefit & Cost
Quantity of Pizzas
$15 10 5 MC
Two Step Process
Step One!
Find the allocatively efficient quantity of Pizzas.
You are looking at the MB and MC associated with the production of different quantities of pizzas.
The quantity of pizzas where MB=MC is the allocatively efficient quantity of pizzas.
200,000!
MB=MC MB

39. Point of Allocative Efficiency
Production Possibilities
Point of Allocative Efficiency Q
Step Two!
2. Then find the quantity of Robots that correspond to that quantity of Pizzas (200,000).
At 200,000, go up to the PPC, then go left, horizontally to the Robot axis. The point on the PPC where the vertical and horizontal lines intersect identifies the one point of allocative efficiency.
Allocative efficiency means – 200,000 pizzas and 9000 robots will maximize the satisfaction of the society. But we must be able to product that combo at least cost! 14 13 12 11 10 9 8 7 6 5 4 3 2 1 A B C
Robots (thousands) D E Q
Pizzas (hundred thousands)

40. Pizzas (hundred thousands)
Production Possibilities Q
Robots (thousands)
Pizzas (hundred thousands) 14 13 12 11 10 9 8 7 6 5 4 3 2 1
Unemployment &
Underemployment
Shown by Point U
Sort of like today!
More of either or
both is possible U

41. Economic Growth This is a BIG Deal!
The ability to produce a larger total output -
a rightward shift of the Production Possibilities curve caused by...
1 – Increase in resource supplies
2 – Better resource quality
3 – Technological advances

42. Pizzas (hundred thousands)
Production Possibilities Q A’ 14 13 12 11 10 9 8 7 6 5 4 3 2 1
Economic Growth B’ C’
Robots (thousands) D’ E’ Q
Pizzas (hundred thousands)

43. Two Examples of Economic Growth
Production Possibilities
Two Examples of Economic Growth
And the importance of today’s decisions on our future!
Presentville - FAVORS
PRESENT GOODS
CURRENT
CURVE
FUTURE
CURVE
Goods for the Future
CONSUMPTION
Goods for the Present
Presentville

44. Two Examples of Economic Growth
Production Possibilities
Two Examples of Economic Growth
And the importance of today’s decisions on our future!
Presentville - FAVORS
PRESENT GOODS
Futureville- FAVORS
FUTURE GOODS
CURRENT
CURVE
CONSUMPTION
FUTURE
CURVE
FUTURE
CURVE
Goods for the Future
Goods for the Future
CONSUMPTION
CURRENT
CURVE
Goods for the Present
Goods for the Present
Presentville
Futureville

45. Applications... Production Possibilities
Unemployment and Productive inefficiency
The Great Depression of the 1930’s
Nations experiencing significant unemployment and unused / under used production capacity.
Economies that allow discrimination of any kind

46. Applications... Production Possibilities
Unemployment and Productive Inefficiency
Tradeoffs and Opportunity Costs
Should land be used for oil production or preserved as wilderness?
Farming or waste disposal,
Should corn be used for fuel or food?
Should society devote more resources to homeland security or education?

47. Applications... Production Possibilities
Unemployment and Productive Inefficiency
Tradeoffs and Opportunity Costs
Shifts in the Production Possibilities Curves
More resources – increase in number of women in the workforce.
Better quality resources – women becoming better educated and professionally trained.
New technologies.

48. Practice constructing answers
Please thoroughly and completely explain The Production Possibility Model
Step 1 – write down the key points to include, in outline format
Step 2 – add detail to each of the key points
Step 3 – construct your response based on this outline

49. You should at least have these items
Description of the model
Assumptions of the model – list and explain!
full production and full employment
fixed resources
fixed technology
two goods – capital and consumer goods
Key concepts – list and explain!
productive efficiency, define, relate to the curve
allocative efficiency - define, how to find and tool to use
Economic Growth
What’s it mean, 3 prereqs, the futureville / presentville case, how to represent graphically.
Law of increasing opportunity cost
Draw picture of the model