Chapter 2: The Economizing Problem

1. Chapter 2:The Economizing Problem Alomar_111

2. In economics, we attempt to solve the following problem: • How to use the scarce resources to attain the maximum fulfillment of unlimited needs? Efficiency: the best use of scarce resources. Alomar_111

3. Full Employment: The use of all available resources. • Full Production: all employed resources should be used to provide the maximum possible satisfaction of needs. Alomar_111

4. Full production implies two main concepts: 1. Productive efficiency: to some mix of goods and services at the lowest cost 2. Allocative efficiency: to produce the most wanted mix of goods and services Alomar_111

5. Since resources are scarce, a full employment and full production economy cannot have an unlimited outputs of goods and services. • Recall: Scarcity, choice, and opportunity cost Alomar_111

6. The Production Possibilities Model • This model explains how scarcity can affect our choice of what good to produce. • It shows the maximum amount of goods and services that can be produced using the available resources and technology. Alomar_111

7. Assumptions of the (PPF) • Full employment • Fixed resources • Fixed technology • Two goods: (X) and (Y) Alomar_111

8. PP Table Alomar_111

9. As we produce more and more of good (X), less and less of good (Y) is produced. • Tradeoff between (X) and (Y): Alomar_111

10. Alomar_111

11. X PPF Y Alomar_111

12. The trade-off is increasing (Law of increasing opportunity cost) thus the PPC is concave. • The PPC is negatively slopped: to produce more of (X), less of (Y) must be produced. Alomar_111

13. Points on the PPF • Points inside the PPF • Points outside the PPF Alomar_111