The universal problem of limited resources and unlimited wants creates the problem of scarcity.

Introduction The study of how societies deal with scarcity is in fact to the study of the study of . Thus… Economics: The study of how Economics societies attempt to satisfy unlimited needs and wants with limited resources.

The Foundation of Economics Terminology A Problem of Scarcity Scarce: a term used to describe items that are finite in quantity Factors of Production: (aka “economic resources”, or the “means of production”) scarce items used in the production of other goods and services. They fall into four broad categories:

Land, sea, and air 1. land as well as all resources that come from it.

Human effort, 2. labour be it physical, mental, or creative.

Tools used in the production process, 3. capital i.e. mechanical, technological, facilities

Human resource engaged in management of 4. entrepreneurship the first three economic resources

More on Opportunity Cost

Economic Choice: Describes any decision that one is Opportunity cost can be a bit confusing. In fact, it can forced to make when they find that they do not have remind us of the old philosophical question, “If a tree enough resources to satisfy all of their needs or wants. falls in a forest, and there is nobody there to hear it, The goal then becomes the maximization of utility (i.e. does it make a sound?” welfare, pleasure, satisfaction). Opportunity cost does “Out-of-Pocket” Cost: The cost associated with an Until a person gives not describe any price. it up, it’s not an economic decision that requires one to forfeit current opportunity cost! economic resources. Rather, the cost must be related to something that Opportunity Cost: The cost associated with an a person gives up in order to have something else. economic decision that requires one to forgo gaining an economic resource they might have otherwise earned. In $50.00 for a pair of running shoes is the “cost” of the economics, it is generally viewed as one’s “next best” shoes, but the shoes themselves will only become an opportunity. “opportunity cost” if a person must give them up in order to have something else (like a dinner out).

1 Taking the example even further… Production Possibility Curve A graphical depiction of the various production combinations $50.00 for a pair of running shoes can indeed be thought attainable assuming all resources are used efficiently. of as an opportunity cost, but only if we think of the money as something we might like to have, for example, as savings.

If a person is debating between saving their $50.00 for a rainy day, or spending their $50.00 on a pair of shoes, then the $50.00 might become an opportunity cost if the person decides to spend that money on the shoes.

The person wanted the money, Until a person gives it up, it’s not an and they wanted the shoes, opportunity cost! but they gave up the money Question: How does the PPC illustrate … scarcity? to have the shoes! …economic choice? …opportunity cost?

Production Possibility Curve A Note on Efficiency A graphical depiction of the various production combinations The PPC model can illustrate productive efficiency by attainable assuming all resources are used efficiently. showing a dot that is right on the PPC.

Why not? Why not?

Question: Why isn’t the production possibility curve straight? Productive efficiency is a situation in which the could not Answer à Law of Increasing Costs. The more of a given product we produce any more of one good without sacrificing production of another produce, the greater its opportunity cost. Why? Not all resources are the good. The concept is illustrated on a production possibility frontier same; some are better suited to different sectors. When the automobile (PPF), where all points on the curve are points of productive efficiency. sector gives up resources for the chair sector, it will give up the resources that are the least suited to automobile production, and vice versa.

Not to be confused with “Allocative Efficiency” An improvement in technology or an innovation in manufacturing methods associated with ONE Allocative efficiency is a state of the economy in which particular product (in this example, chairs) will also production represents consumer preferences; in particular, every good or service is produced up to the point where the create a new production possibility curve. last unit provides a marginal benefit to consumers equal to the marginal cost of producing.

Allocative efficiency is most popularly illustrated by equilibrium: where supply (marginal cost) equals demand (marginal benefit). The new curve illustrates an increased efficiency associated with chairs - but not automobiles.

2 Naturally, an increase in population will create a new production possibility curve with more attainable combinations. Exploring Economic Systems

The new curve illustrates an increased efficiency associated with both products.

Command Market Command Economy: (aka Communism or Centrally Market Economy: (aka Free Enterprise or Capitalism) An economy in which economic decisions are made by Planned) An economy in which economic decisions are private citizens. The forces of supply and demand play a made by a central authority, without input from the critical role in influencing these decisions. citizenry. Key Philosophy à “It is not from the benevolence of the butcher, the Key Philosophy à “From each according to his abilities, brewer, or the baker that we expect our dinner, but from their regard to each according to his needs.” () to their own interest.” () Answers to the three economic questions: Answers to the three economic questions:

Whatever will generate the greatest profit for 1. What Whatever the central authority feels is 1. What necessary. producers. Thus, whatever consumers want the most.

Through the most efficient means possible. Citizens 2. How The central authority controls all economic 2. How resources and directs workers to various areas. are free to start businesses and seek employment.

For whoever has the money required to 3. For Whom For everybody. Everyone receives an 3. For Whom equal share of the society’s output. purchase the output.

Mixed Mixed Economy: (aka Modified Free Enterprise) An economy in which economic decisions are made by both private citizens and a central authority. The forces of supply and demand play a critical role in influencing these decisions, as does the social conscience of the government. Government decisions may also be influenced by public will. Answers to the three economic questions:

Whatever will generate the greatest profit for 1. What producers. Whatever citizens demand through government.

Through the most efficient means possible. 2. How Citizens are free to start businesses and seek employment with private or public firms.

For whoever has the money required to 3. For Whom purchase the output, or the need for social assistance from government.

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