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Econ 202
Topic: McConnell & Brue, Chapter #2
Title: The Economizing Problem
I. Foundations of Economics
1.
Insatiable material human wants
2. Scarce or limited resources
3. Alternative uses of resources to produce different goods
II. Efficiency
1. Mechanical - Output per unit of input.
2. Economic - Monetary output per unit of input. Cheaper is better.
III. Full Employment Concept
All available scarce resources should be used to maximum potential if society is to reach
maximum satisfaction of insatiable human wants.
IV. To achieve maximum human welfare need:
1. Allocative efficiency - resources used to produce goods and services society wants most.
2. Distributive efficiency - goods and services are distributed to consumers at least cost.
V. Economizing Problem
Because resources are scarce, a full employment, full production economy cannot have an
unlimited output of goods and services.
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VI. Production Possibilities Concept and Increasing Opportunity Cost
1. Assumptions
2. Tabular Model
Alternatives
Food
Clothing
A
0
1000
B
1000
900
C
2000
700
D
3000
400
E
4000
0
3. Graphic Model
4. Opportunity Cost - Amount of one good you must give up to get a given amount of
another good.
5. Law of Increasing Opportunity Cost - As society wants more and more of one good, it
must give up successively greater amounts of other goods.
Reason for law -- resources are not perfect substitutes in production of all goods.
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VII. Institutional Systems used to respond to the economizing problem
1. Capitalism -- Laissez faire; free enterprise; let it be; private property.
2. Command economy -- authoritarism or dictatorial socialism.
3. Mixed systems -- democratic socialism; modern capitalism.
4. Traditional system -- based on cultural; it has always been done that way.
VIII. Circular Flow of Economic Activity
1. Model Assumptions
(1) Two markets
(2) Two sectors
(3) No taxes
(4) No government spending
(5) No imports or exports
2. Model
Money Income: (1) rent, (2) wages, (3) interest