1. Chapter 2: The Economizing Problem
AP Macroeconomics

2. The Economizing Problem
Foundations based on 2 facts:
Society’s economic wants (unlimited & insatiable)
Economic Resources (scarcity)

3. Want Versus Needs
Consumers may desire a product but not need it; therefore unfilled wants
Objective of economic activity is to fulfill wants

4. Scarce Resources
All natural, human, and manufactured resources that go into the production of goods and services

5. Resource Categories
Four Factors

6. Resource Categories (1/4)
Land: includes arable land, forests, mineral, oil, water…

7. Resource Categories (2/4)
Capital (capital goods): all manufactured aids used in production
Tools, machinery, equipment, factory, storage, transportation…

8. Resource Categories (3/4)
Labor: all physical and mental talents of individuals

9. Resource Categories (4/4)
Entrepreneurial Ability
Takes Initiative, driving force behind production
Strategic business decisions
Innovator
Risk bearer

10. Resource Payments Retail and investment income
Income from supplying materials
Those who supply labor (wages)
Entrepreneurial income (profits)

11. Economics: Employment and Efficiency

12. Full Employment The use of all available resources
All willing workers employed
All capital and land in use
*A great idea?* (Kids, Conservation, Holidays)

13. Full Production
All employed resources used to provide maximum possible satisfaction of wants
Failure to achieve this is known as resource underemployed

14. Productive Efficiency
Production of goods and services in the least costly way

15. Allocative Efficiency
Apportioning resources amongst industry to obtain right combination of goods and services

16. Production Possibilities Table
Used to assist people to choose goods and services to produce and which to forgo

17. Production Possibilities Table
Lists different combinations of the two products

18. Production Possibilities Table
Assumptions:
Full employment and productive efficiency
Fixed resources
Fixed technology
Two goods to contrast (consumer vs. capital goods)

19. The Need for Choice
To favor one product would limit production of the other
More consumer goods means less capital goods

20. Production Possibilities Curve
Production Alternatives
Type of Product A B C D E
Pizzas (in thousands) 1 2 3 4
Robots (in thousands) 10 9 7
Data presented from table to graph

21. Production Possibilities Curve
Law of Opportunity Costs
The more of a product produced, the greater opportunity cost

22. Economic Rationale
Economic resources are not completely adaptable to alternative uses
Lack of flexibility cause increased opportunity costs
Example of farm land, grow ingredients or mine minerals

23. Allocative Efficiency
After studying curve, what is the optimal point of production?
Marginal Benefit (MB) = Marginal Costs (MC)

24. Unemployment, Growth, the Future

25. Unemployment Causes economy to produce less and be less efficient (U)
Discrimination can lead to less output

26. Growth Amount of resources may change over time
Examples: Bigger population, more irrigation, oil discoveries
Not a guarantee for future growth

27. Advances in Technology
Technology can increase possibilities
“Dot.com Bubble”

28. Present Choices and the Future
Goods for the present represent consumer goods
Goods for the future create growth

29. International Trade
Directing resources to efficient products to sell abroad

30. Economic Systems
Market versus Command

31. Economic Systems Institutional arrangements and coordinating mechanism
Differ as
Who owns production?
Method used to coordinate and direct activity

32. The Market System (Capitalism)
Private ownership of resources
Use of markets and prices to coordinate and direct economy
Individuals act in their own self-interest
Competition drives production

33. The Market System (Capitalism)
“Pure” Capitalism
Laissez-Faire policies limit the role government plays
Complete Laissez-Faire can be dangerous, as-well-as complete control

34. The Command System (Socialism)
Government owns property resources and economic decisions occurs through a central planning board
Board decides production goals, resource allocation

36. The Circular Flow Model
Households and Businesses Key Market Decision Makers

37. The Circular Flow Model
Interrelated web of decision making and economic activity of households and businesses
Real Flow
Money Flow

38. The Resource Market Resource Market
Place where resources or services of suppliers are bought and sold

39. The Production Model Production Market
Place where goods and services by businesses are bought and sold