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?

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

The
Economizing
Problem
part 1

Learning Objectives:
Students will thoroughly and completely explain:
The 4 basic input factors of production,
The individuals economizing problem,
Societys economizing problem.
The basic types of economic systems,
The circular flow model.

The Foundations of Economics

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

The Foundations of Economics

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

Goods & Services Provide...

UTILITY
A measure of satisfaction or pleasure.

Goods & Services Provide

UTILITY
Individuals want luxuries goods and services

Goods & Services Provide...

UTILITY
As well as necessities

The objective of all economic activity

Is to fulfill wants.

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

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!

Scarce Resources
Economic Resources
Property Resources
LAND
CAPITAL
HUMAN RESOURCES

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

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

SCARCE RESOURCES
ECONOMIC RESOURCES
PROPERTY RESOURCES
LAND
CAPITAL

Also known
as the

Input
Factors of
HUMAN RESOURCES
Production
LABOR
ENTREPRENEURIAL ABILITY

Resource Payments
PROPERTY RESOURCES
RENTAL
LAND
INCOME
INTEREST
CAPITAL
INCOME
HUMAN RESOURCES
LABOR
ENTREPRENEUR

WAGES
PROFIT &
LOSS

The Individuals 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?

Budget Line (constraint) for the

Individual
DVDs
$20

Books
$10

6
5
4
3
2
1
0

0
2
4
6
8
10
12

12
10
Income = $120

Quantity of DVDs

$120 Budget

=6

Pdvd = $20

Unattainable

Income = $120

Pb = $10

2
0

= 12

Attainable

10

12

Quantity of Paperback Books

14
1-17

Societys 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

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?

Key Concepts of the

model
Full Employment the use of all

available resources
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.

The Production Possibilities model

Assumptions
1. Full Employment and Full Production
2. Fixed resources in both quantity and quality
3. Fixed technology
4. Two Goods a consumer good and a capital good

Production Possibilities

A Consumer Good

Assumes...
Full Employment
and Productive
PEfficiency
I
Z
FixedZResources
A
Fixed Technology
Two Goods
for example...

Production Possibilities

A Capital Good

Assumes...
Full Employment
and Productive
EfficiencyR
ob o
Fixed Resources
t
s
Fixed Technology
Two Goods
for example...

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...

Production Possibilities

in table form
PIZZA

0 1 2 3 4

(in hundred thousands)

ROBOTS
(in thousands)

109 7 4 0

Production Possibilities

in table form
PIZZA

0 1 2 3 4

(in hundred thousands)

ROBOTS

109 7 4 0

(in thousands)

(thousands)

Robots

graphical form

Pizzas (hundred thousands)

Production Possibilities

in table form
PIZZA

0 1 2 3 4

(in hundred thousands)

ROBOTS

109 7 4 0

(in thousands)

(thousands)

Robots

graphical form

Pizzas (hundred thousands)

Production Possibilities

in table form
PIZZA

0 1 2 3 4

(in hundred thousands)

ROBOTS

109 7 4 0

(in thousands)

(thousands)

Robots

graphical form

Pizzas (hundred thousands)

Production Possibilities

in table form
PIZZA

0 1 2 3 4

(in hundred thousands)

ROBOTS

109 7 4 0

(in thousands)

(thousands)

Robots

graphical form

Pizzas (hundred thousands)

Production Possibilities

in table form
PIZZA

0 1 2 3 4

(in hundred thousands)

ROBOTS

109 7 4 0

(in thousands)

(thousands)

Robots

graphical form

Pizzas (hundred thousands)

Production Possibilities

imited Resources means

limited output...
At any point in time, a full-employment, fullproduction economy must sacrifice some of
product X to obtain more of product Y.

Production Possibilities

Robots (thousands)

Q 14
13
12
11
10
9
8
7
6
5
4
3
2
1

Unattainable
B
C

Attainable
& Efficient

Attainable
but
Inefficient
1

Note: Every point on the curve

represents productive
efficiency

E
4

Pizzas (hundred thousands)

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.

Production Possibilities
*

Robots (thousands)

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.
C
D

Attainable
but
Inefficient
1

E
4

Pizzas (hundred thousands)

To find the point of allocative efficiency,

you can use Marginal analysis, which involves:
Comparing marginal benefits and marginal costs
Heres how to think about marginal analysis:
1. Any economic activity should be expanded
as long as Marginal benefits exceed Marginal
costs.
2. The optimal amount of activity occurs at
MB=MC
3. No resources beyond the MB=MC point
should be allocated to the production of that
good. In fact, you should reduce the use of

Production Possibilities
Note: every point on the PPC consists of pizza robot pairs!

Robots (thousands)

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?
Heres How to Figure it out!

C
D

Two Step Process:

1. Find the allocatively efficient
quantity of Pizzas.

Attainable
but
Inefficient
1

E
4

2. Then find the quantity of Robots

that correspond to that quantity of
Pizzas.

Pizzas (hundred thousands)

Production Possibilities

Allocative Efficiency: MB=MC

Marginal Benefit & Cost

MC

$15

MB=MC

Two Step Process

Step One!
1.Find the allocatively
efficient quantity of Pizzas.
You are looking at the MB and
MC associated with the
production of different
quantities of pizzas.

10

MB
1

Quantity of Pizzas

The quantity of pizzas where

MB=MC is the allocatively
efficient quantity of pizzas.
200,000!

Production Possibilities
Point of Allocative Efficiency

Robots (thousands)

Q 14
13
12
11
10
9
8
7
6
5
4
3
2
1

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.

C
D

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!

E
1

Pizzas (hundred thousands)

Production Possibilities

Robots (thousands)

Q 14

Unemployment &
Underemployment
Shown by Point U

13
12
11
10
9
8
7
6
5
4
3
2
1

Sort of like today!

More of either or
both is possible

Pizzas (hundred thousands)

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

Production Possibilities

Robots (thousands)

Q 14

13
12
11
10
9
8
7
6
5
4
3
2
1

Economic
Growth

E
1

Pizzas (hundred thousands)

Production Possibilities

Two Examples of
Economic Growth

Goods for the Future

And the importance

of todays decisions on our
Presentville
- FAVORS
future!
PRESENT GOODS
CURRENT
CURVE
FUTURE
CURVE
CONSUMPTION

Goods for the Present

Presentville

Production Possibilities

Two Examples of
Economic Growth
CURRENT
CURVE
FUTURE
CURVE
CONSUMPTION

Goods for the Present

Presentville

Goods for the Future

Goods for the Future

And the-importance
of todays decisions
on our future!
Presentville
FAVORS
FuturevilleFAVORS
PRESENT GOODS
FUTURE GOODS
CONSUMPTION
FUTURE
CURVE
CURRENT
CURVE
Goods for the Present

Futureville

Production Possibilities

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

Production Possibilities

Applications...

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?

Production Possibilities

Application
s...and Productive Inefficiency
Unemployment

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.

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

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

Whats it mean, 3 prereqs, the futureville /

presentville case, how to represent graphically.

Law of increasing opportunity cost