OUTLINE -- CHAPTER 2
The Economizing Problem: Making Choices
Lectures

2a Globalization

I. The Necessity of Choice -- Production Possibilities

A. The Economizing Problem -- The Necessity of Choice
The choices necessitated because society’s material wants for goods and services are unlimited but the resources available to satisfy these wants are limited.

1. Unlimited Wants
2. Limited resources

B. Production Possibilities -- Demonstrating the Necessity of Choice

1. Production Possibilities Table
a. shows the MAXIMUM POSSIBLE LEVELS OF PRODUCTION given the assumptions
b. assumptions
1) fixed resources
2) fixed technology
3) productive efficiency
4) full employment
5) only two goods

c. the necessity of choice -- Unattainable combinations

2. Production Possibilities Curve

a. the necessity of choice -- Unattainable combinations
b. opportunity costs
1) ALL costs in economics are opportunity costs
2) definition

The amount of other products which must be forgone or sacrificed to produce a unit of a product.

3) examples

  • coming to class today
  • a Big Mac
  • attending NIU
  • "free" trip
  • life?

4) calculating opportunity costs

c. law of increasing costs

1) definition

As the production of a good increases the opportunity cost of producing an additional unit rises.

2) shape of the PPC -- concave
3) rationale

d. unemployment
e. productive inefficiency

f. economic growth (Macro Issue)

1) Two (Three) Definitions
  • Increasing our ABILITY to Produce (Ch 2 Def.)
    • causes
      • more resources
      • better resources
      • better technology
    • graphically
    • "ABILITY"
  • Increasing Output
    • graphically
    • caused by:
      • reduce UE,
      • or reduce. prod ineff.
      • OR Ch. 2 Def. ???
  • Increasing GDP per capita

g. present choices, future possibilities

h. optimum product mix? (allocative efficiency?)

C. Real World Applications

1. going to war
2. discrimination
3. growth: Japan vs. U.S.
4. international trade
5. other

II. The Circular Flow Model

The flow of resources from households to firms and of products from firms to households. These flows are accompanied by reverse flows of money from firms to households and from households to firms.

A. Two Markets
1. product market

A market in which products are sold by firms and bought by households.

a. how much to buy
b. how much to produce

2. resource market

A market in which households sell and firms buy resources or the services of resources.

a. how many to hire
b. how much we earn

B. Two Flows

1. real flow
2. money flow

C. Reversal of Roles
D. Limitations