1. ©2005 McGraw-Hill Ryerson Ltd. Chapter 2 1 The Economic Problem: Scarcity, Wants, and Choices SLIDES PREPARED BY JUDITH SKUCE, GEORGIAN COLLEGE

2. ©2005 McGraw-Hill Ryerson Ltd.Chapter 22 In this chapter you will learn 2.1 The foundation of economics: unlimited wants and scarce resource 2.2 The nature of economic efficiency 2.3 How to achieve economic growth 2.4 The two general types of economic systems society can choose to coordinate production and consumption decisions 2.5 What the circular flow model is

3. ©2005 McGraw-Hill Ryerson Ltd.Chapter 23 Chapter 2 Topics 2.1 The Foundation of Economics 2.2 Efficiency: Getting the Most From Available Resources 2.3 Unemployment, Growth & the Future 2.4 Economic Systems 2.5 The Circular Flow Model

4. ©2005 McGraw-Hill Ryerson Ltd.Chapter 24 The Foundation of Economics Society has virtually unlimited wants…Society has virtually unlimited wants… But resources are limited or scarceBut resources are limited or scarce

5. ©2005 McGraw-Hill Ryerson Ltd.Chapter 25 Unlimited Wants Goods & services provide utilityGoods & services provide utility Desire for a particular good can be satisfied, but not desire for goods in generalDesire for a particular good can be satisfied, but not desire for goods in general The objective of all economic activity is to fulfill wantsThe objective of all economic activity is to fulfill wants

6. ©2005 McGraw-Hill Ryerson Ltd.Chapter 26 Resource Categories Property Resources LandLand

7. ©2005 McGraw-Hill Ryerson Ltd.Chapter 27 Resource Categories Property Resources LandLand CapitalCapital

8. ©2005 McGraw-Hill Ryerson Ltd.Chapter 28 Notes.... INVESTMENT FINANCIAL CAPITAL REAL CAPITAL Resource Categories Property Resources LandLand CapitalCapital

9. ©2005 McGraw-Hill Ryerson Ltd.Chapter 29 Resource Categories Property Resources LandLand CapitalCapital Human Resources LabourLabour

10. ©2005 McGraw-Hill Ryerson Ltd.Chapter 210 Resource Categories Property Resources LandLand CapitalCapital Human Resources LabourLabour Entrepreneurial AbilityEntrepreneurial Ability –takes initiative –makes policy decisions –innovates –bears risk

11. ©2005 McGraw-Hill Ryerson Ltd.Chapter 211 PROPERTY RESOURCES HUMAN RESOURCES LandRent WagesLabour Resource Payments Entrepreneur Profit & Loss CapitalInterest

12. ©2005 McGraw-Hill Ryerson Ltd.Chapter 212 Relative Scarcity resources (inputs) are scarce or limited in supplyresources (inputs) are scarce or limited in supply ultimate constraints on productionultimate constraints on production

13. ©2005 McGraw-Hill Ryerson Ltd.Chapter 213 Chapter 2 Topics 2.1 The Foundation of Economics 2.2 Efficiency: Getting the Most From Available Resources 2.3 Unemployment, Growth & the Future 2.4 Economic Systems 2.5 The Circular Flow Model

14. ©2005 McGraw-Hill Ryerson Ltd.Chapter 214 Definition of Economics Social science concerned with efficient use of scarce resources to attain maximum fulfillment of society’s unlimited wantsSocial science concerned with efficient use of scarce resources to attain maximum fulfillment of society’s unlimited wants Doing the best with what we haveDoing the best with what we have

15. ©2005 McGraw-Hill Ryerson Ltd.Chapter 215 Getting the Most from Available Resources Full employment: using available resourcesFull employment: using available resources Full production: using resources efficientlyFull production: using resources efficiently –productive efficiency producing goods & services in the least costly wayproducing goods & services in the least costly way –allocative efficiency producing goods & services most wanted by societyproducing goods & services most wanted by society

16. ©2005 McGraw-Hill Ryerson Ltd.Chapter 216 Production Possibilities Assumptions: full employment & productive efficiencyfull employment & productive efficiency fixed resourcesfixed resources fixed technologyfixed technology two goodstwo goods –pizzas symbolize consumer goods –industrial machines symbolize capital goods

17. ©2005 McGraw-Hill Ryerson Ltd.Chapter 217 Production Possibilities What if we could produce onlyWhat if we could produce only –10,000 machines

18. ©2005 McGraw-Hill Ryerson Ltd.Chapter 218 Production Possibilities What if we could produce onlyWhat if we could produce only –10,000 machines oror –400,000 pizzas using ALL of our resourcesusing ALL of our resources to get some pizzas we have to give up some machines! to get some pizzas we have to give up some machines!

19. ©2005 McGraw-Hill Ryerson Ltd.Chapter 219 Production Possibilities Pizza (00,000s) 01234 Machines (000s) 109740

20. ©2005 McGraw-Hill Ryerson Ltd.Chapter 220 Production Possibilities Pizza (00,000s) 01234 Machines (000s) 109740

21. ©2005 McGraw-Hill Ryerson Ltd.Chapter 221 Production Possibilities Pizza (00,000s) 01234 Machines (000s) 109740

22. ©2005 McGraw-Hill Ryerson Ltd.Chapter 222 Production Possibilities Pizza (00,000s) 01234 Machines (000s) 109740

23. ©2005 McGraw-Hill Ryerson Ltd.Chapter 223 Production Possibilities Pizza (00,000s) 01234 Machines (000s) 109740

24. ©2005 McGraw-Hill Ryerson Ltd.Chapter 224 Production Possibilities Pizza (00,000s) 01234 Machines (000s) 109740

25. ©2005 McGraw-Hill Ryerson Ltd.Chapter 225 Production Possibilities Pizza (00,000s) 01234 Machines (000s) 109740 productionpossibilitiescurveproductionpossibilitiescurve

26. ©2005 McGraw-Hill Ryerson Ltd.Chapter 226 Production Possibilities A B C D E Wattainableunattainable attainable but inefficient Figure 2-1

27. ©2005 McGraw-Hill Ryerson Ltd.Chapter 227 Production Possibilities Law of Increasing Opportunity Cost opportunity cost increases with amount producedopportunity cost increases with amount produced as we make more pizzas, the # of machines we have to give up (per pizza) increasesas we make more pizzas, the # of machines we have to give up (per pizza) increasesillustrated...

28. ©2005 McGraw-Hill Ryerson Ltd.Chapter 228 Production Possibilities Pizza (00,000s) 01234 Machines (000s) 109740 opportunity cost of 1 st 100,000 pizzasopportunity cost of 1 st 100,000 pizzas =1,000 machines

29. ©2005 McGraw-Hill Ryerson Ltd.Chapter 229 Production Possibilities Pizza (00,000s) 01234 Machines (000s) 109740 opportunity cost of 2 nd 100,000 pizzasopportunity cost of 2 nd 100,000 pizzas =2,000 machines

30. ©2005 McGraw-Hill Ryerson Ltd.Chapter 230 Production Possibilities Pizza (00,000s) 01234 Machines (000s) 109740 opportunity cost of 3 rd 100,000 pizzasopportunity cost of 3 rd 100,000 pizzas =3,000 machines

31. ©2005 McGraw-Hill Ryerson Ltd.Chapter 231 Production Possibilities Pizza (00,000s) 01234 Machines (000s) 109740 opportunity cost of 4 th 100,000 pizzasopportunity cost of 4 th 100,000 pizzas =4,000 machines

32. ©2005 McGraw-Hill Ryerson Ltd.Chapter 232 Production Possibilities Pizza (00,000s) 01234 Machines (000s) 109740 Opportunity Cost 1st Pizza Unit = 1 Robot Unit Opportunity Cost 2nd Pizza Unit = 2 Robot Units Opportunity Cost 3rd Pizza Unit = 3 Robot Units Opportunity Cost 4th Pizza Unit = 4 Robot Units the more pizzas we make, the more each one costs, the more each one costs, in terms of machines foregone in terms of machines foregone the more pizzas we make, the more each one costs, the more each one costs, in terms of machines foregone in terms of machines foregone

33. ©2005 McGraw-Hill Ryerson Ltd.Chapter 233 Production Possibilities Law of Increasing Opportunity Cost as we make more pizzas, the # of machines we have to give up (per pizza) increasesas we make more pizzas, the # of machines we have to give up (per pizza) increases so production possibilities curve gets steeper and steeperso production possibilities curve gets steeper and steeper

34. ©2005 McGraw-Hill Ryerson Ltd.Chapter 234 Production Possibilities A B C D E Figure 2-1 1 st pizza unit costs 1 machine unit

35. ©2005 McGraw-Hill Ryerson Ltd.Chapter 235 Production Possibilities A B C D E Figure 2-1 2 nd pizza unit costs 2 machine units

36. ©2005 McGraw-Hill Ryerson Ltd.Chapter 236 Production Possibilities A B C D E Figure 2-1 3 rd pizza unit costs 3 machine units

37. ©2005 McGraw-Hill Ryerson Ltd.Chapter 237 Production Possibilities A B C D E Figure 2-1 4 th pizza unit costs 4 machine units

38. ©2005 McGraw-Hill Ryerson Ltd.Chapter 238 Production Possibilities A B C D E Figure 2-1 the more pizza we make, the more machines we give up  the steeper the curve

39. ©2005 McGraw-Hill Ryerson Ltd.Chapter 239 Production Possibilities Shape of the Curve concave to the originconcave to the origin Economic Rationale resources are not completely adaptable to alternative usesresources are not completely adaptable to alternative uses

40. ©2005 McGraw-Hill Ryerson Ltd.Chapter 240 decide on allocative efficiency by comparing Marginal (extra) Cost (MC) to Marginal Benefit (MB)decide on allocative efficiency by comparing Marginal (extra) Cost (MC) to Marginal Benefit (MB) Marginal Benefit is the extra benefit associated with consuming one more unitMarginal Benefit is the extra benefit associated with consuming one more unit Marginal Cost is the extra opportunity cost of that extra unitMarginal Cost is the extra opportunity cost of that extra unit Allocative Efficiency Revisited

41. ©2005 McGraw-Hill Ryerson Ltd.Chapter 241 MC MB MB > MC  underallocation of resources MB > MC  underallocation of resources Allocative Efficiency Revisited

42. ©2005 McGraw-Hill Ryerson Ltd.Chapter 242 MC MB Allocative Efficiency Revisited MB < MC  overallocation of resources MB < MC  overallocation of resources

43. ©2005 McGraw-Hill Ryerson Ltd.Chapter 243 MC MB too few too many MB=MCMB=MC Allocative Efficiency Revisited

44. ©2005 McGraw-Hill Ryerson Ltd.Chapter 244 Chapter 2 Topics 2.1 The Foundation of Economics 2.2 Efficiency: Getting the Most From Available Resources 2.3 Unemployment, Growth & the Future 2.4 Economic Systems 2.5 The Circular Flow Model

45. ©2005 McGraw-Hill Ryerson Ltd.Chapter 245 Unemployment & Productive Inefficiency A B C D E Figure 2-3 U a point like U represents unemployment or underemployment

46. ©2005 McGraw-Hill Ryerson Ltd.Chapter 246 Unemployment & Productive Inefficiency A B C D E Figure 2-3 U more of either or both products is possible

47. ©2005 McGraw-Hill Ryerson Ltd.Chapter 247 A Growing Economy increases in factor suppliesincreases in factor supplies advances in technologyadvances in technology

48. ©2005 McGraw-Hill Ryerson Ltd.Chapter 248 Unemployment & Productive Inefficiency A'A'A'A' B'B'B'B' C'C'C'C' D'D'D'D' E'E'E'E' Figure 2-4

49. ©2005 McGraw-Hill Ryerson Ltd.Chapter 249 Present Choices & Future Possibilities Figure 2-5 Goods for the Present Goods for the Future FAVOURING PRESENT GOODS FutureCurve

50. ©2005 McGraw-Hill Ryerson Ltd.Chapter 250 Present Choices & Future Possibilities Figure 2-5 Goods for the Present Goods for the Future FAVOURING FUTURE GOODS FutureCurve Goods for the Present Goods for the Future FAVOURING PRESENT GOODS FutureCurve

51. ©2005 McGraw-Hill Ryerson Ltd.Chapter 251 A Qualification: International Trade an individual nation is limited by the production possibilities curvean individual nation is limited by the production possibilities curve but NOT when there is international specialization and trade!but NOT when there is international specialization and trade! –possible to consume ABOVE the production possibilities curve

52. ©2005 McGraw-Hill Ryerson Ltd.Chapter 252 Examples & Applications Unemployment & Productive InefficiencyUnemployment & Productive Inefficiency –The Great Depression –discrimination trade-offs & Opportunity Coststrade-offs & Opportunity Costs –logging or wilderness? Shifts in Production Possibilities CurvesShifts in Production Possibilities Curves –cell phones, the Internet

53. ©2005 McGraw-Hill Ryerson Ltd.Chapter 253 Chapter 2 Topics 2.1 The Foundation of Economics 2.2 Efficiency: Getting the Most From Available Resources 2.3 Unemployment, Growth & the Future 2.4 Economic Systems 2.5 The Circular Flow Model

54. ©2005 McGraw-Hill Ryerson Ltd.Chapter 254 Economic Systems resource allocation methods differ according to:resource allocation methods differ according to: –resource ownership –co-ordination method

55. ©2005 McGraw-Hill Ryerson Ltd.Chapter 255 The Market System private ownership of capitalprivate ownership of capital prices & markets co-ordinate activityprices & markets co-ordinate activity independent actions of buyers & sellersindependent actions of buyers & sellers pure capitalismpure capitalism  limited role for government Canadian capitalismCanadian capitalism  government plays a substantial role

56. ©2005 McGraw-Hill Ryerson Ltd.Chapter 256 The Command System socialism, communismsocialism, communism government owns most resourcesgovernment owns most resources central planningcentral planning North Korea & Cuba last remaining examplesNorth Korea & Cuba last remaining examples

57. ©2005 McGraw-Hill Ryerson Ltd.Chapter 257 Chapter 2 Topics 2.1 The Foundation of Economics 2.2 Efficiency: Getting the Most From Available Resources 2.3 Unemployment, Growth & the Future 2.4 Economic Systems 2.5 The Circular Flow Model

58. ©2005 McGraw-Hill Ryerson Ltd.Chapter 258 BUSINESSES The Circular Flow Model Figure 2-6

59. ©2005 McGraw-Hill Ryerson Ltd.Chapter 259 HOUSEHOLDS The Circular Flow Model Figure 2-6 BUSINESSES

60. ©2005 McGraw-Hill Ryerson Ltd.Chapter 260 RESOURCEMARKET FACTORS OF PRODUCTION INPUTS The Circular Flow Model Figure 2-6 BUSINESSES HOUSEHOLDS

61. ©2005 McGraw-Hill Ryerson Ltd.Chapter 261 RESOURCEMARKET INPUTS The Circular Flow Model Figure 2-6 BUSINESSES HOUSEHOLDS $ COSTS $ INCOMES FACTORS OF PRODUCTION

62. ©2005 McGraw-Hill Ryerson Ltd.Chapter 262 PRODUCTMARKET GOODS & SERVICES SERVICES The Circular Flow Model Figure 2-6 BUSINESSES HOUSEHOLDS RESOURCEMARKET PRODUCTMARKET INPUTS $ COSTS $ INCOMES FACTORS OF PRODUCTION

63. ©2005 McGraw-Hill Ryerson Ltd.Chapter 263 GOODS & SERVICES SERVICES $ CONSUMPTION $ REVENUE The Circular Flow Model Figure 2-6 BUSINESSES HOUSEHOLDS RESOURCEMARKET PRODUCTMARKET INPUTS $ COSTS $ INCOMES FACTORS OF PRODUCTION

64. ©2005 McGraw-Hill Ryerson Ltd.Chapter 264 Chapter 2 Topics 2.1 The Foundation of Economics 2.2 Efficiency: Getting the Most From Available Resources 2.3 Unemployment, Growth & the Future 2.4 Economic Systems 2.5 The Circular Flow Model