CHAPTER II:
ECONOMIC
PROBLEM
Reported by:
GROUP 1
CJ Macasio
Rica Cassandra Coronel
Jasmine Galagate
Vernalyn Ianthe Diaz
Elyssa Jane Capili
Mary Jane Conde
Wenslyn Reamico
WHAT IS THE ECONOMIC PROBLEM?
• The problem of deciding or choosing how to satisfy unlimited wants with limited resources.
• This is also often used as a definition for Economics.
-The economizing problem involves the allocation of resources among competing wants. There is an
economizing problem because there are:
A. unlimited wants
B. limited resources
-Resources and factor payments:
The basic factor that determines the share of total production each person receives is:
Income (wages as a return on labor)
Rent (as a return on land & buildings)
Interest (as a return on capital)
Profit (as a reward for taking risks in the production process) risk taker called "Entrepreneur "
-Full employment includes the natural rate of unemployment and down time for normal maintenance
(both capital & labor).
-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.
➢ Allocative efficiency is a property of an efficient market whereby all goods and services are
optimally distributed among buyers in an economy.
Pareto Optimal - is a situation where no individual or preference criterion can be made better off without
making at least one individual or preference criterion worse off.
Pareto Superior -The allocation known as Pareto Superior occurs when one person benefits more from a
decision than another
▪ Technical efficiency is the effectiveness with which a given set of inputs is used to produce an
output.
▪ Full employment is the situation where all people who are available and searching for work can
find a job at the prevailing remuneration rates and conditions.
➢ Allocating resources means that decisions must be made, and every option is costly due to the
opportunity cost of the lost alternative. A. A next best alternative that must be given due to a
particular decision.
➢ The production possibilities curve, a simple model that shows possibilities. A. In a basic
production possibilities curve model, an assumption is needed to represent production possibilities.
Increasing Opportunity Cost
- Economic theory states that while production of one good is increased over time, the production of the
other good must be reduced over time as a sacrifice.
- Economic decisions are made in a marginal way, which implies that each choice to produce or consume
is chosen separately.
Efficiency
- A situation in which the quantities of goods and services produced are those that people value most
highly.
- Resource use is efficient when we cannot produce more of a good or service without giving up some of
another good or service that people value more highly.
Economic growth
- A PPF that moves outward indicates that an economy's production capacity has risen.
- When an economy has lost or used up some of its limited resources, a PPF will turn inward. This lowers
an economy's capacity for production.
Economic Systems rarely exist in a pure form.
1. Pure Capitalism
- private ownership of productive capacity, very limited government, and motivated by self-interest.
a. Laissez Faire
- Government hands-off, markets relied-upon to perform allocations.
b. Costs of freedom
-Freedom to compete in markets
2. Command
- Government makes the decisions with force of law (sometimes martial force)
- Often associated with dictatorship
3. Traditional
- Based on social mores or ethics or other non-market, non-legislative bases.
Christmas gift giving is tradition
Socialism - maximizes individual welfare based on perceived needs not contributions.
Communism - everyone shares equally in the output of society.
1. The former Soviet Union espoused communism, but was also mostly command.
2. Utopian movement in the U.S
Mixed system - contains elements of more than one system. U.S economy is a mixed system.
All of the high income, industrialized economies are mixed economies.
Even with mixed systems there are substantial variations in the amounts of socialism, capitalism, tradition
and command exist in each example.
