The problems of resource allocation P'17

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Chapter 2 The problems of resource allocation
(P.17)

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Your work
Your resources 3 million
Your aim (objective) start a business and
earn the largest possible profit
Question List the problems you have to face
Answer
Which 3 questions are most important to you?
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Problems of resource allocation (P.17)
Scarcity ? 3 (basic) economic problems
Scarcity ? Cannot produce everything we want

• Cannot produce more of all goods (?production of
  1 good
• ? ? production of other goods)

Need to decide what goods to produce and in what
quantities
? What to produce question
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Problems of resource allocation (P.17)
There are many production methods to produce 1
good.
Which production method is the best and be chosen?

• How to produce question
• which production method?

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Problems of resource allocation (P.17)
Not everyone can get the goods produced
Who is to get how much of societys output?

• For whom to produce question
• how to distribute the goods produced?

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Summary of 3 basic economic problems
1. What to produce? (the output question)
2. How to produce? (the input question)
3. For whom to produce? (the distribution
question)
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How to solve the 3 economic problems? (P.18)

• By market forces
• (in a market / free economy)

2. by command (in a command / planned
economy)

• By customs and traditions
• (in a traditional economy)

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Differences (P.23)
Market economy Command economy
Features
Most productive resources are privately owned.
Most productive resources are owned by the
government.
People are free to make production and
consumption decisions
The government makes most of the production
decisions.
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Differences (P.23)
Market economy Command economy
How problems of resource allocation are solved?
1. What to produce?
Market prices serve as signals in deciding what
goods to produce and in what quantities. (i.e.
solved by the price mechanism or market mechanism)
The government draws its production plans, and
decides what goods and in what quantities to
produce.
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Differences (P.23)
Market economy Command economy
How problems of resource allocation are solved?
2. How to produce?
Producers find the lowest-cost production
method factor prices guide them in their choice
of production method
The method of production is determined by central
planning (the government).
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Differences (P.23)
Market economy Command economy
How problems of resource allocation are solved?
3. For whom to produce?
The government controls peoples wage rates and
abilities to pay. It also rations the limited
quantity of goods to its people.
Peoples ability and willingness to pay
determine the quantity of goods they can get.
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Resource allocation in traditional economy (P.24)

• What to produce?
• Follow their ancestors in deciding what to
  produce

2. How to produce? Follow their
ancestors method of production

• For whom to produce?
• Follow their customs and traditions

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The mixed economy (P.24)
Command economy
Market economy
Mixed economy
Real world all economies are mixed economy

• Features
• Some resources are owned privately and some are
  owned by the government.
• Problems of resource allocation are solved by
  market forces, government, and customs and
  traditions together.

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Problems of resource allocation (P.17)
How to ?the profit of firms?
Profit Total revenue Total cost

• ?total revenue and ?total cost

There are many production methods to produce 1
good.
Should choose the production method which can
minimize the total cost of production

• The how to produce question
• which production method?