2. Economic Problems
Lecture Notes
1. The economizing problem involves the allocation of resources among competing
wants. There is an economizing problem because there are:
d. unlimited wants
e. limited resources
2. Resources and factor payments:
d. land - includes space (i.e., location), natural resources, and what is
commonly thought of as land.
1. land is paid rent
e. capital - are the physical assets used in production - i.e., plant and
equipment.
2. capital is paid interest
f. labor - is the skills, abilities, knowledge (called human capital) and the
effort exerted by people in production.
3. labor is paid wages
d. entrepreneurial talent - (risk taker) the economic agent who creates the
enterprise.
4. entrepreneurial talent is paid profits
3. Full employment includes the natural rate of unemployment and down time for
normal maintenance (both capital & labor). However, full production or 100%
capacity utilization cannot be maintained for a prolonged period without labor
and capital breaking-down:
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, a. underemployment - utilization of a resource in a manner, which is less
than what is consistent with full employment - using an M.D. as a practical
nurse.
4. Economic Efficiency consists of the following three components:
a. allocative efficiency - is measured using a concept known as Pareto
Superiority (or Optimality)
1. Pareto Optimal - is that allocation where no person could be made
better off without inflicting harm on another.
2. Pareto Superior - is that allocation where the benefit received by one
person is more than the harm inflicted on another. [cost - benefit
approach]
b. technical efficiency - for a given level of output, you minimize cost or
(alternatively) for a given level of cost you maximize output.
c. full employment - for a system to be economically efficient then full
employment is also required.
5. Allocations of resources imply that decisions must be made, which in turn
involves choice. Every choice is costly; there is always the lost alternative -- the
opportunity cost:
a. opportunity cost - the next best alternative that must be foregone as a
result of a particular decision.
6. The production possibilities curve is a simple model that can be used to show
choices:
a. assumptions necessary to represent production possibilities in a simple
production possibilities curve model:
8
Lecture Notes
1. The economizing problem involves the allocation of resources among competing
wants. There is an economizing problem because there are:
d. unlimited wants
e. limited resources
2. Resources and factor payments:
d. land - includes space (i.e., location), natural resources, and what is
commonly thought of as land.
1. land is paid rent
e. capital - are the physical assets used in production - i.e., plant and
equipment.
2. capital is paid interest
f. labor - is the skills, abilities, knowledge (called human capital) and the
effort exerted by people in production.
3. labor is paid wages
d. entrepreneurial talent - (risk taker) the economic agent who creates the
enterprise.
4. entrepreneurial talent is paid profits
3. Full employment includes the natural rate of unemployment and down time for
normal maintenance (both capital & labor). However, full production or 100%
capacity utilization cannot be maintained for a prolonged period without labor
and capital breaking-down:
7
, a. underemployment - utilization of a resource in a manner, which is less
than what is consistent with full employment - using an M.D. as a practical
nurse.
4. Economic Efficiency consists of the following three components:
a. allocative efficiency - is measured using a concept known as Pareto
Superiority (or Optimality)
1. Pareto Optimal - is that allocation where no person could be made
better off without inflicting harm on another.
2. Pareto Superior - is that allocation where the benefit received by one
person is more than the harm inflicted on another. [cost - benefit
approach]
b. technical efficiency - for a given level of output, you minimize cost or
(alternatively) for a given level of cost you maximize output.
c. full employment - for a system to be economically efficient then full
employment is also required.
5. Allocations of resources imply that decisions must be made, which in turn
involves choice. Every choice is costly; there is always the lost alternative -- the
opportunity cost:
a. opportunity cost - the next best alternative that must be foregone as a
result of a particular decision.
6. The production possibilities curve is a simple model that can be used to show
choices:
a. assumptions necessary to represent production possibilities in a simple
production possibilities curve model:
8
