Chapter Summary

1. Economics is grounded on two basic facts: (a) wants are virtually unlimited; (b) resources are scarce.

2. Resources may be classified as property resources—raw materials and capital—or as human resources—labour and entrepreneurial ability. These resources constitute the factors of production.

3. Economics is concerned with the problem of using scarce resources to produce the goods and services that satisfy the material wants of society. Both full employment and the efficient use of available resources are essential to maximize want satisfaction.

4. Efficient use of resources consists of productive efficiency (producing all output combinations in the least costly way) and allocative efficiency (producing the specific output mix most desired by society).

5. An economy that is achieving full employment and productive efficiency—that is operating on its production possibilities curve— must sacrifice the output of some types of goods and services in order to increase the production of others. Because resources are not equally productive in all possible uses, shifting resources from one use to another brings the law of increasing opportunity costs into play. The production of additional units of one product requires the sacrifice of increasing amounts of the other product.

6. Allocative efficiency means operating at the optimal point on the production possibilities curve. That point represents the highest-valued mix of goods and is determined by expanding the production of each good until its marginal benefit (MB) equals its marginal cost (MC).

7. Over time, technological advances and increases in the quantity and quality of resources enable the economy to produce more of all goods and services—that is, to experience economic growth. Society's choice as to the mix of consumer goods and capital goods in current output is a major determinant of the future location of the production possibilities curve and thus of economic growth.

8. The market system and the command system are the two broad types of economic systems chapter two • the economic probLem: scarcity, wants, And choices used to address the economic problem. In the market system (or capitalism) private individuals own most resources and markets coordinate most economic activity. In the command system (or socialism or communism), government owns most resources and central planners coordinate most economic activity.

9. The circular flow model locates the product and resource markets and shows the major real and money flows between businesses and households. Businesses are on the buying side of the resource market and the selling side of the product market. Households are on the selling side of the resource market and the buying side of the product market.

tERMs AnD concepts allocative efficiency, p. 30 capital, p. 28 capital goods, p. 31 circular flow model, p. 43 command system, p. 42 consumer goods, p. 31 economic growth, p. 38 economic problem, p. 27 economic resources, p. 28 economic system, p. 42

entrepreneurial ability, p. 28 factors of production, p. 29 full employment, p. 29 full production, p. 30 investment, p. 28 labour, p. 28 land, p. 28

law of increasing opportunity costs, p. 34 market system, p. 42

opportunity cost, p. 32 product market, p. 43 production possibilities curve, p. 32

production possibilities table, p. 31

productive efficiency, p. 30 resource market, p. 43 utility, p. 27

study questions

1. Explain this statement: "If resources were unlimited and were freely available, there would be no subject called economics."

2. Comment on the following statement from a newspaper article: "Our junior high school serves a splendid hot meal for $1 without costing the taxpayers anything, thanks in part to a government subsidy."

3. Critically analyze: "Wants aren't insatiable. I can prove it. I get all the coffee I want to drink every morning at breakfast." Explain: "Goods and services are scarce because resources are scarce." Analyze: "It is the nature of all economic problems that absolute solutions are denied to us."

4. What are economic resources? What are the major functions of the entrepreneur?

5. KEY QUESTION Why is the problem of unemployment part of the subject matter of economics? Distinguish between productive efficiency and allocative efficiency. Give an illustration of achieving productive, but not allocative, efficiency.

6. KEY QUESTION Here is a production possibilities table for war goods and civilian goods:

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