MODULE 1 TOPIC 3: ECONOMIZING PROBLEM

unlimited wants and limited resources

The economizing problem of the society

land, capital, labor, entrepreneurial ability

resources

Land

Rent

taxes

Capital

all manufactured (man-made) aids

investment

financial

Labor

human

wages

Entrepreneurial ability

enterprise

profits

1. _ – includes all natural resources (“gifts of nature”) used in the production
process (e.g., arable land, forests, mineral and oil deposits, and water resources),
as well as space (i.e., location). “_” is the payment for the use of land (the idea
that most natural resources are not/cannot be privately-owned, land requires
rental payment for its use, the rental payment may come in for example, in the
form of _).

2. _– (or _ goods) includes ___ used in producing consumer goods and services. Included are all factory, storage, transportation, and distribution facilities, as well as tools and machinery. Economists refer to the purchase of capital goods as _. Note that the
term “capital” as used in economics, refers not to money but to tools, machinery,
and other productive equipment. Because money produces nothing, it is not
considered as an economic resource. Money (or money capital or _ capital)
is simply a means for purchasing capital goods.

3. _ – consists of the physical and mental talents of individuals used in
producing goods and services. It refers to skills, abilities, knowledge (called
_ capital) and the effort exerted by people in production. “_” is the
payment for the use of labor, it is a monetary compensation paid by an employer
to an employee in exchange for work done.

4. _ – a special human resource, distinct from labor, which
refers to the talents or abilities of economic agent who creates an _
(initiates in combining the resources to create an enterprise; makes strategic
business decisions; an innovator; a risk bearer). The entrepreneurial talent is paid
“_”, the amount remaining after subtracting from the revenues (or sales) of a
firm the total monetary costs of all business activities, as well as the opportunity
costs of all resources used in the current business activity

No, only to tools, machinery etc. Money produces nothing; hence, it is not an economic resource

Can capital refer to to money?

efficiently

Economic efficiency

Full employment

Full production

Scarce resources are ideally best allocated if societies used them ___.
____________ means that the societies are able to produce the maximum output
given limited inputs. It consists of the following components (or the
requirements):
1. _____ – the economy is employing all its available resources (implies
quantity of resources)
2. _____ – employed resources must contributed to their greatest to total
output (implies quality of resources)

quantity
quality

1. Full employment – the economy is employing all its available resources (implies
_ of resources)
2. Full production – employed resources must contribute their greatest to total
output (implies _ of resources)

investment

financial and real capital

phsyical resources

2 types of answer abve

no

is money an economic resouce

labor and entrepreneurial ability

human resouces

rent

interest

wages

profit & loss

property resources:

land ←

capital ←

hr:

labor ←

entrepreneur ←

Efficiency

Full Employment

Full Production

_ is getting the most from available resources.
(1) _ – using available resources
(2) _ – using resources that contribute the
most to production

production possibilities

Society uses its scarce resource to produce goods and services. How does a
society decide how scarce resources are used? The alternatives and choices a society
faces can best be understood through a macroeconomic model of _

full

false - given time period only

technology

false, only two

assumptions of an economy for PPP:

*Is at its (full/minimum) employment condition;
• Is using resources past the time period given including the next period, thus assumed fixed resources
supply; - true or false?
• Is using whatever _ (the methods used to produce output) present
at that time period (fixed technology); and
• Is producing two to three goods. - t or f?

Production Possibilities Curve (PPC)

A model which depicts that there is a limit to what an
economy can produce given available resources.
A model which reveals that decisions to produce goods and
services have opportunity cost because of the limit of
resources at a particular time period

Production Possibilities Table

lists the different combination of two
products that can be produced with a specific set of resources

consumer

capital

sample:

The economy decides to produce only two goods: rice symbolizes
_ goods (goods that satisfy wants directly) and industrial robots
symbolize _ goods (products that satisfy wants indirectly by making
possible more efficient production of consumer goods)

Production Possibilities Curve (PPC)

employed

_ – a curve which shows the various combinations of two goods that a society in a fully _ economy, assuming a fixed availability of supplies of resources and constant technology.

• downward sloping

• concave

Characteristics of PPC

Downward sloping

Concave

concavity

adaptable

Characteristics of PPC

_
If the society wants to move from one point to another point, it requires that
one good has to be given up or sacrificed (increase X, decrease Y). The
rationale for this is that there is an opportunity cost involved in deciding to
increase one production at the expense of the other good. Because resources
are fixed at a given production time period, an increase in one production requires that the society needs to reduce the inputs used in the other production to increase the inputs used to produce more of the other good

_
_ (bowed out from the point of origin) means that as X increases, Y
decreases at an increasing rate. This means that as more and more of pizza
is produced, more and more of industrial robots must be given up. This is
called the law of increasing opportunity cost. The economic rationale for
the law of increasing opportunity costs is that economic resources are not
completely _ to alternative uses. Many resources are better at
producing one type of good than at producing others. This means that as
resources are pulled away from one good, the resources will not readily adapt
to their next use. This therefore will become costlier for the society to produce
one good at the expense of the other good.

maximum

robots

rice

output

false, unattainable

Analysis of the PPC:

• All combinations on the curve are _
output of the two products; the limit of
attainable output.
• Points on the curve are attainable with minimum resources used. - true or false?
• Point A means that all resources are devoted
in the production of _.
• Point E means that all resources are devoted
in the production of _.
• Points lying inside the curve are also
attainable, but they reflect less total _
and therefore are less desirable as points on
the curve.
• Points beyond the production possibilities
curve, like W, would represent a greater
output than the output at any point on the
curve. Such points are
attainable with the current availability of
resources and technology. - true or false

A to B Opportunity cost of 1st sack (add’l 100,000) of rice = _ Robot
B to C Opportunity cost of 2nd sack (add’l 100,000) of rice = Robots
C to D Opportunity cost of 3rd sack (add’l 100,000) of rice = Robots
D to E Opportunity cost of 4th sack (add’l 100,000) of rice = Robots

Law of Increasing Opportunity Costs:

■ opportunity cost increases with amount produced
■ as we make more pizzas, the # of robots we have to give
up (per pizza) increases

U

unemployment

Any point inside the production
possibilities curve, such as _,
represents _ or a
failure to achieve full employment.
The arrows indicate that by realizing
full employment, the economy could
operate on the curve. This means it
could produce more of one or both
products than it is producing at point
U.

economic growth

A society can still attain a combination of goods and services beyond its PPC. And
when this happens, the society experiences what is called _ which
means that more goods and services are produced than the previous time period

Economic Growth:

a rightward shift of the production
possibilities curve caused by....
1. Increases in resource supplies
2. Advances in technology
3. Use of specialized inputs (e.g., hybrid rice)
4. Engage in international specialization and trade

1. Increases in resource supplies
2. Advances in technology
3. Use of specialized inputs (e.g., hybrid rice)
4. Engage in international specialization and trade

Economic Growth: a rightward shift of the production
possibilities curve caused by....

economic growth

What phenomenon is happening in the picture

yes

Does scarcity impose everyone to make a choice?

1. What to produce? –This question allows decision
makers to determine what their scarce resources will
be best used for. Goods and services are produced to
meet people’s wants and needs or to satisfy the
demands of the society, that is based on many
factors.
2. How to produce? – This question allows the
economy to determine what combination of inputs will
be used to produce goods and services. Ideally, the
best combination of inputs is that which produces at
the least-cost possible way.
3. For whom to produce? – This question allows
societies to decide who gets the produced output
(e.g., willingness to pay, centralized distribution such
as the case of communism)

In allocating scarce resources, these choices of societies revolve around 3 basic economic problems:

What to produce

How to produce

least cost possible way

For whom to produce

1. _? –This question allows decision
makers to determine what their scarce resources will
be best used for. Goods and services are produced to
meet people’s wants and needs or to satisfy the
demands of the society, that is based on many
factors.
2. _? – This question allows the
economy to determine what combination of inputs will
be used to produce goods and services. Ideally, the
best combination of inputs is that which produces at
the _ possible way.
3. _? – This question allows
societies to decide who gets the produced output
(e.g., willingness to pay, centralized distribution such
as the case of communism)

Goods and services are produced to
meet people’s wants and needs or to satisfy the
demands of the society, that is based on many
factors.

why are goods and services produced?

basic economic questions

economic system

what goods are produced, how they are produced, who gets them

Every society needs to develop an _ – a particular set of
institutional arrangements and a coordinating mechanism – to respond to the
economizing problem.

It has to determine _, how to accommodate change, and
how to promote technological progress.

who owns the factors of production

the method used to motivate, coordinate, and direct economic activity

the command system and the market system

Economic systems differ as to (1) _ and (2) _. Economic
systems have two polar extremes: _

traditional economic system

A _ is one in which people’s economic roles are the
same as those of their parents or grandparents. Tradition decides what the
people do for a living and how their work is performed. Whatever is done in the
past is still carried on at present. Societies in this system are still self-sufficient
and needs very little interaction from highly populated and urbanized societies

command system

central planning board

This system is also known as communism, where the government owns most
property resources and economic decision making occurs through a central
economic plan.

A _ appointed by the government makes nearly all the major decisions concerning the use of resources, the composition and distribution of output, and the organization of production.

command system

The government
owns most of the business firms, which produce according to government
directives. The central planning board determines production goals for each
enterprise and specifies the amount of resources to be allocated to each
enterprise so that it can reach its production goals. The division of output between
capital and consumer goods is centrally decided, and capital goods are allocated
among industries on the basis of the central planning board’s long-term priorities

Market system or capitalism

market

_ is the polar alternative to the command system. This
system is one in which a nation’s economic decisions are the result of individual
decisions by buyers and sellers in the market. A _ is a mechanism which
brings together buyers and sellers. This system is the widely adapted economic
system of most countries in the world.

Private Ownership of Property Resources

Freedom of Enterprise and Choice

Self-Interest

Competition

Markets and Prices

Technology and Capital Goods

Specialization

Use of Money

Active, but Limited Government: “Laissez Faire” (Leave it Alone) Ideology

The following are important characteristics
of a market system:

1. encourage investment, innovation, exchange, maintenance of property
and economic growth;
2. also extend to intellectual property through patents, copyrights, and
trademarks;
3. facilitate exchange;
4. encourage owners to maintain or improve their property so as to preserve
or increase its value; and
5. enable people to use their time and resources to produce more goods and
services, rather than using them to protect and retain the property they
have already produced or acquired

What property
rights can do are the following:

Freedom of enterprise

Freedom of choice

_ ensures that entrepreneurs and private businesses
are free to obtain and use economic resources to produce their choice of
goods and services and to sell them in their chosen markets.

_ enables owners to employ or dispose of their property
and money as they see fit. It also allows workers to try to enter any line of
work for which they are qualified. Finally, it ensures that consumers are free
to buy the goods and services that best satisfy their wants and that their
budgets allow

self-interest

In the market system, _ is the motivating force of the various
economic units as they express their free choices. _ simply means
that each economic unit tries to achieve its own particular goal, which usually
requires delivering something of value to others.

competition

diffuses economic power

Market system allows competition or economic rivalry based on the freedom
of choice exercised in the pursuit of monetary return. Competition requires:
• Many buyers and many sellers acting independently in a particular product
or resource market.
• Freedom of sellers and buyers to enter or leave markets, on the basis of
their economic self-interest.

What competition can do:
• _ – no single buyer or seller can dictate the price
of the product or resource because others can undercut that price; limits
the potential abuse of power
• no insurmountable barriers prevent an industry’s expanding or contracting
and provides the economy with the flexibility needed to remain efficient
over time and enables the economy to adjust to changes in consumer
tastes, technology, and resource availability

markets and prices

Millions of decisions made by households and businesses are highly
coordinated with one another by _, which are key
components of the market system. They give the system its ability to
coordinate millions of daily economic decisions. A market system conveys the
decisions made by buyers and sellers of products and resources. The
decisions made on each side of the market determine a set of product and
resource prices that guide resource owners, entrepreneurs, and consumers
as they make and revise their choices and pursue their self-interest.

technology and capital goods

The market system therefore encourages extensive use and rapid
development of complex capital goods: tools, machinery, large-scale
factories, and facilities for storage, communication, transportation, and
marketing. Advanced _ are important because the
most direct methods of production are often the least efficient. The only way
to avoid that inefficiency is to rely on capital goods

false

direct methods

the most indirect methods of production are often the least efficient. The only way
to avoid that inefficiency is to rely on capital goods

true or false?

Specialization

_ is the use of resources of an individual, firm, region, or nation
to produce one or a few goods or services rather than the entire range of
goods and services. Those goods and services are then exchanged for a full
range of desired products

money

A rather obvious characteristic of any economic system is the extensive use
of _. It performs several functions, but first and foremost it is a
medium of exchange. It makes trade easier

Active, but Limited Government: “Laissez Faire” (Leave it Alone) Ideology

Market system relies on the idea that it can be “left alone” without too much
government intervention. Market system is characterized as self-adjusting,
self-regulating system. The government’s role is limited to provision of legal
framework. However limited, the role of government is active and important
because market system has inherent shortcomings.

mixed system

Today, modern economies have evolved to encompass several characteristics of
several economic systems. Market economies, although giving their constituents
a very wide range of economic choices and freedom, still enjoy reasonable
government intervention, especially in basic goods and services. Most real-world
economies today are considered mixed, many are heavily reliant on market
system (free enterprise economy) with government intervention (command
system)

national, state, and local

providing the legal structure

maintaining competition

redistributing income

reallocating resources

promoting stability

The economic activities of the public sector – _________ government –
are extensive. The economic functions of government:

Providing the Legal Structure

gov

Maintaining Competition

regulation and through antitrust

Redistributing Income

policies and programs

reallocating resources

promoting stability

_ provides the legal framework and the services needed for a market
economy to operate effectively. The legal framework sets the legal status of
business enterprises, ensures the rights of private ownership, and allows the
making and enforcement of contracts. Government also establishes the legal
“rules of the game” that control relationships among businesses, resource
suppliers, and consumers. Discrete units of government referee economic
relationships, seek out foul play, and impose penalties. Government intervention
is presumed to improve the allocation of resources.

_
When monopoly exists, an industry is controlled by controlling supply and charging
higher price, this is the essence of monopoly power. Governments can correct this
situation by controlling monopoly through _. For
example, telecommunications industry in the Philippines used to be a monopoly.
But since the government deregulated the industry, competition was brought back
with more suppliers now than it used to.

_
The market system is impersonal and may distribute income more inequitably than
society desires. The system has created statuses and income levels, making a
gap between the rich and the poor. The poor have less access to some goods and
services. Thus, society chooses to redistribute a part of total income through a
variety of government _.

_

Market failure occurs when the competitive market system (1) produces the
“wrong” amounts of certain goods and services or (2) fails to allocate any
resources whatsoever to the production of certain goods and services whose
output is economically justified.

_

Unemployment. When private sector spending is too low, resulting in
unemployment, the government may try to increase total spending (private +
public) by raising its own spending or by lowering tax rates to encourage
greater private spending. Also, the nation’s central bank may take monetary
actions to lower interest rates, thereby encouraging more private borrowing
and spending.
Inflation. Inflation is a general increase in the level of prices. Prices of goods
and services rise when the amount of spending in the economy expands more
rapidly than the supply of goods and services. This can happen when the
nation’s central bank allows interest rates to remain too low for the economic
circumstances. In such situations, the central bank can act to lower inflation
by increasing the interest rate so as to dampen private borrowing and
spending. The government may also try to reduce total spending by cutting its
own expenditures or boosting tax rates to reduce private spending.

legal status of business enterprises, ensures the rights of private ownership, and allows the
making and enforcement of contracts

what does the legal framework set

Transfer payments

Market intervention

Taxation

redistributing income

society chooses to redistribute a part of total income through a
variety of government policies and programs. They are:
• – Government payments can come in the form of welfare
checks and food stamps, provide relief to the destitute, the dependent, the
disabled, and older citizens
_ – Government also alters the distribution of income by acting to modify the prices that are or
would be established by market forces. Providing farmers with above-market
prices for their output and requiring that firms pay minimum wages are
illustrations of government interventions designed to raise the income of
specific groups.
• _ – The government uses the personal income tax to take a larger
proportion of the income of the rich than of the poor, thus narrowing the after-
tax income difference between high-income and low- income earners.

produces the “wrong” amounts of certain goods and services

fails to allocate any resources whatsoever to the production of certain goods and services whose output is economically justified

Market failure occurs when the competitive market system (1) _ or (2) _.

externalities

public goods and services

market failures r in the form of

reallocating resources

externality

negative externalities

positive

Public Goods and Services

free-rider problem

An _ occurs when some of the costs or the benefits of a good are
passed on to or “spill over to” someone other than the immediate buyer or
seller. Such spillovers are called externalities because they are benefits or
costs that accrue to some third party that is external to the market transaction.
Externalities can be negative or positive. When production or consumption
costs inflicted on a third party without compensation, the costs are called
_. Environmental pollution is an example. Some
externalities get resolved via private negotiations between those creating the
externalities and those affected by them. But when the externalities are
widespread and negotiation between parties is unrealistic, government can
play an important role. For example, legislation prohibiting or limiting a
negative externality can be applied especially in the case of pollution. Another
is an imposition of specific taxes, a less direct action imposed on a polluting
firm that adds to cost of production.

Sometimes externalities appear as benefits to other producers or consumers.
These un-compensated spillovers accruing to third parties or the community
at large are called _ externalities. Immunization against measles and
polio results in direct benefits to the immediate consumer of those vaccines.
But it also results in widespread substantial external benefits to the entire
community. Education is another example of positive externalities. Education
benefits individual consumers: Better-educated people generally achieve
higher incomes than less-well- educated people. But education also provides
benefits to society, in the form of a more versatile and more productive labor
force, on the one hand, and smaller outlays for crime prevention, law
enforcement, and welfare programs, on the other. Government can further
enhance positive externality especially when the benefit is under-allocated
through subsidies (for consumers and producers). Government may finance
or, in the extreme, own and operate the industry that is involved.

b. _
Everyone can simultaneously obtain the benefit from a public good (eg.,
national defense, street lighting, and environmental protection). One person’s benefit does not reduce the benefit available to others. More important, there
is no effective way of excluding individuals from the benefit of the good once
it comes into existence. The inability to exclude creates a _,
in which people can receive benefits from a public good without having to pay
for it. With taxation, government then spends the tax proceeds to provide
public goods and services. Taxation releases resources from the production
of private consumer goods (food, clothing, television sets) and private
investment goods (printing presses, boxcars, warehouses). Government shifts
those resources to the production of public and quasi-public goods (post
offices, submarines, parks), changing the composition of the economy’s total
output.

promoting stability

Unemployment

total spending

Inflation. Inflation

_. When private sector spending is too low, resulting in
_, government may try to increase _ (private +
public) by raising its own spending or by lowering tax rates to encourage
greater private spending. Also, the nation’s central bank may take monetary
actions to lower interest rates, thereby encouraging more private borrowing
and spending.

• _ is a general increase in the level of prices. Prices of goods
and services rise when the amount of spending in the economy expands more
rapidly than the supply of goods and services. This can happen when the
nation’s central bank allows interest rates to remain too low for the economic
circumstances. In such situations, the central bank can act to lower inflation
by increasing the interest rate so as to dampen private borrowing and
spending. The government may also try to reduce total spending by cutting its
own expenditures or boosting tax rates to reduce private spending.

acting to modify the prices that are or
would be established by market forces. Providing farmers with above-market
prices for their output and requiring that firms pay minimum wages are
illustrations of government interventions designed to raise the income of
specific groups.

how does gov do market intervention