1.
|
The study of economics rests on the
bases of two facts:
- Society’s material wants are unlimited.
- The economic resources which are the ultimate means of
satisfying these wants are scarce in relation to the wants
|
- Economic resources are classified as land
capital
labor
and entrepreneurial ability.
- The payments received by those who provide the economy
with these four resources are rental income
interest income
wages
and profits
respectively.
- Because these resources are scarce (or limited)
the
output that the economy is able to produce is also limited.
|
|
| 2. |
Economics
then
is the study of how society’s
scarce resources are used (administered) to obtain the greatest satisfaction of its
material wants. To be efficient in the use of its resources
an economy must achieve both
full employment and full production.
- Full employment means that the economy is using all
available resources.
- Full production means that all resources used for
production should contribute to the maximum satisfaction of society’s material wants.
Full production implies that there is
|
- productive efficiency
in which the goods and services
society desires are being produced in the least costly way.
- allocative efficiency
in which resources are devoted
to the production of goods and services society most highly values.
|
- The production possibilities table indicates the
alternative combinations of goods and services an economy is capable of producing when it
has achieved full employment and full production.
|
- The four assumptions usually made when a production
possibilities table is constructed is that economic efficiency
fixed resources
fixed
technology
and two products are being considered.
- The table illustrates the fundamental choice every
society must make: what quantity of each product it wants produced.
|
- The data in the production possibilities table can be
plotted on a graph to obtain a production possibilities curve.
- The opportunity cost of producing an additional unit
of one product is the total amount of other products that are sacrificed. The law of
increasing opportunity costs reflects that the opportunity cost of producing additional
units of a product increases as more of that product is produced.
|
- The law of increasing opportunity costs results in a
production possibilities curve that is concave (from the origin).
- The opportunity cost of producing additional units of
a product increases as more of the product is produced because resources are not
completely adaptable to alternative uses.
|
- Allocative efficiency means that resources are devoted
to the optimal product mix for society. This optimal mix is determined by assessing
marginal costs and benefits.
|
- The marginal-cost curve for a product rises because of
the law of increasing opportunity costs; the marginal-benefit curve falls because the
consumption of a product yields less and less satisfaction.
- There will be underallocation of resources to
production of a product when the marginal benefit is greater than the marginal cost
and
overallocation when the marginal cost is greater than the marginal benefit.
- Allocative efficiency is achieved when the marginal
cost of a product equals the marginal benefit of a product.
|
|
| 3. |
Different outcomes will occur when assumptions
underlying the production possibilities model are relaxed.
- Unemployment. The economy may be operating at a point
inside the production possibilities curve if the assumption of full production and
productive efficiency no longer holds. In this case
there will be an unemployment of
resources and production will not occur in the least costly way.
- Economic Growth. The production possibilities curve
can move outward if the assumption of fixed resources or the assumption of no
technological change is dropped.
|
- Economic growth can occur when there is an expansion
in the quantity and quality of resources
or when there is technological advancement.
- The combination of goods and services an economy
chooses to produce today helps determine its production possibilities in the future.
|
- International trade and specialization allow a nation
to obtain more goods and services than what is indicated by its production possibilities
curve
and thus the effect is similar to an increase in economic growth.
|
| 4. |
There are many applications of the production
possibilities model. Seven are discussed in the chapter: society’s production of
military or consumer goods
discrimination
land-use controversies
women in the labor
force
economic growth in Japan and the United States
famine in Africa
and emerging
technologies.
|
| 5. |
Different economic systems differ as to how they
respond to the economizing problem.
- At one extreme is pure capitalism
which relies on the
private ownership of its economic resources and the market system.
- At the other extreme
the command economy uses the
public ownership of its resources and central planning.
- Economies in the real world lie between these two
extremes and are hybrid systems.
- Some less-developed nations have traditional (or
customary) economies which are shaped by the society’s customs and traditions.
|
| 6. |
The circular flow model is a device used to clarify
the relationships between households and business firms in a purely capitalistic economy.
- In resource markets
households supply and firms
demand resources
and in product markets
the firms supply and households demand products.
Households use the incomes they obtain from supplying resources to purchase the goods and
services produced by the firms
and in the economy there is a real flow of resources and
products and a money flow of incomes and expenditures.
- The circular flow model has several limitations.
|
