Intro Econs

Chapter 2: Resource Utilisation

Defining Economics

Economics: The study of efficient allocation of scarce means of

production, to satisfy human wants.
o Efficiency
Emphasises need to maximise material output with given
resources.
o Means of Production
Resources
Technological ability to produce output from resources
o Satisfaction of Human Wants
The purpose of an economy
Definition does not distinguish wants from needs
* Scarcity: Limited resources in the world.

Central Problem of Economics: Scarcity

Reasons for economic problem of scarcity:

o Limited resources
o (Assumed) unlimited human wants
Economy: A system for organising allocation of resources to produce &
distribute goods & services that satisfy human wants

4 Economic Resources

1) Land (Natural resources)

2) Labour (Work)
3) Capital (Produced goods, used to produce other goods & services)
4) Entrepreneurial ability (Effort to organise production process)
* Correlation: Sell resources in return for income.
Resource Income
Land Rent
Labour Wage
Capital Interest
Entrepreneurial ability Profit/Loss

Opportunity Cost

Opportunity cost: The forgone value of the next best alternative.

o Value of the item given up
o Economists assume we will choose the more valuable option
o Opportunity cost may or may not have a monetary value
Full Employment & Full Production

Full employment: When a societys human resources are being used

with maximum efficiency
o 4-6% unemployment rate => Considered full employment
o There will always be a small % of labour force between jobs
Full production: When a societys resources are most efficiently
allocated
o Includes both physical & human resources
o 85-90% capacity utilisation rate => Considered full production
o There will always be a small % of resources not fully utilised
E.g. Machine breakdowns

Underemployment of Resources

Underemployment: Unemployment & low capacity utilisation lowers

productive output
o Society not allocating resources efficiently enough to maximise
output
o Unemployment rate > 5% => Underemployment of labour
resources
o Capacity utilisation rate < 85% => Underemployment of capital
resources
o Underemployment of resources occur during recessions.
Underemployment of societys resources
o Employment discrimination
Excludes members of particular groups from particular jobs
People kept from being fully productive

Production Possibilities Curve (PPC)

PPC: Represents economy at full employment & full production

Productive efficiency: Only occurs when operating on the PPC
o Output of one good cannot be attained without reducing the
output of another good
o Any point above PPC is unachievable; any point below PPC is
underutilised/underemployed
Points X, Y, Z:
Economy producing below efficiency.

Capital under utilised/ Workforce

underemployed.

Points A, B, C, D, E, F:
Efficient with full employment & full production.

Point W:
Above the PPC => Not achievable.
Law of Increasing Costs

Law of increasing costs: As the output of one good expands, the

opportunity cost of producing additional units of this good increases.

Economic Growth

Enables a society to produce even more

Causes of economic growth:
o More/Better trained labour force
o More/Improved plant & equipment (Capital)
o Technological improvements
E.g. From typewriters to computers
Economic growth can be illustrated with a new PPC.
Investing in future growth:
o Investment in capital equipment today => Future economic growth