If resources were abundant without limit, then we would not have a scarcity of the products they produce. Economic problems are problems of relative scarcity—wants exceed resources in the relative sense. The fact that totally free goods and services do not exist provides support for the notion that total fulfillment of our wants is impossible. What are the major functions of the entrepreneur?
Economic resources are of four main types: labor, land natural resources , real capital machines, factories, buildings, etc. Economic resources are also called factors of production or inputs in the productive process. As these names imply, economic resources are required to produce the outputs desired by society.
Since certain outputs are desired, they command a price and so, therefore, do economic resources. This can lead to some things being economic resources in some circumstances but not in others.
Water in the middle of a lake, for example, is not an economic resource: Anyone can have it free. But the same water piped to a factory site is no longer free: Its movement must be paid for by taxes or by a specific charge. These four types of resources are highlighted in the circular flow diagram where the type of income accruing to each type of resource is shown.
Entrepreneurs are risk-takers: They coordinate the activities of the other three inputs for profit—or loss, which is why they are called risk-takers. Entrepreneurs sometimes manage companies that they own, but a manager who is not an owner is not necessarily an entrepreneur but may be performing some of the entrepreneurial functions for the company.
Entrepreneurs are also innovators, or perhaps inventors, and profits help to motivate such activities. Distinguish between allocative efficiency and productive efficiency. Give an illustration of achieving productive, but not allocative, efficiency. Economics deals with the "limited resources—unlimited wants" problem. Unemployment represents valuable resources that could have been used to produce more goods and services—to meet more wants and ease the economizing problem.
Allocative efficiency means that resources are being used to produce the goods and services most wanted by society. The economy is then located at the optimal point on its production possibilities curve where marginal benefit equals marginal cost for each good. Productive efficiency means the least costly production techniques are being used to produce wanted goods and services.
Example: manual typewriters produced using the least-cost techniques but for which there is no demand. Type of Production Production Alternatives. Rockets 0. Show these data graphically. Upon what specific assumptions is this production possibilities curve based?
If the economy is at point C, what is the cost of one more automobile? One more rocket? Explain how this curve reflects increasing opportunity costs. What must the economy do to operate at some point on the production possibilities curve? The assumptions are full employment and productive efficiency, fixed supplies of resources, and fixed technology. Increasing opportunity costs are.
This means the economy must give up larger and larger amounts of rockets to get constant added amounts of automobiles—and vice versa. How might this difference relate to opportunity costs? Those who are college-educated have the potential of earning more income than those who did not finish high school.
The opportunity cost sacrifice of goods and services of not working is much greater for those with the higher earning potential.
Would you drive there and buy it? The more a product is demanded by consumers or other businesses, the higher the price businesses can charge, and so the more of the product will be supplied. In a market economy , decisions about what products are available and at what prices are determined through the interaction of supply and demand. A competitive market is one in which there is a large number of buyers and sellers, so that no one can control the market price.
A free market is one in which the government does not intervene in any way. A free and competitive market economy is the ideal type of market economy, because what is supplied is exactly what consumers demand.
Price controls are an example of a market that is not free. When government intervenes, the market outcomes will be different from those that would occur in a free and competitive market model. When markets are less than perfectly competitive e. Figure 2. Command economies operate very differently. In a command economy , economic effort is devoted to goals passed down from a ruler or ruling class. Ancient Egypt was a good example: a large part of economic life was devoted to building pyramids like the one at the left , for the pharaohs.
Medieval manor life is another example: The lord provided the land for growing crops and protection in the event of war. In the last century, communist countries have employed command economies. In a command economy, resources and businesses are owned by the government. The government decides what goods and services will be produced and what prices will be charged for them.
The government decides what methods of production will be used and how much workers will be paid. Some necessities like health care and education are provided for free, as long as the state determines that you need them. With the collapse of the former Soviet Union in the s, command economies fell out of favor as an economic system. This may be a role of government. Capitalism tends to achieves allocative efficiency. Capitalism tends to achieve productive efficiency.
The most productively efficient technique will be the one that produces a given amount of output with the smallest input of limited resources. The productivity of the resources, the relative supply of particular resources, and the ownership of the resources will determine the income of individuals and households. Prices help signal those changes and the market will respond. This guiding function of prices is essential to a well-functioning market system.
In the absence of such signals, government or some similar institution would have to decide where resources are allocated, but without knowing what people in society want.
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