The Economic Problem Opportunity Cost Production Possibility Frontiers

The Economic Problem

Unlimited Wants Scarce Resources Land, Labour, Capital Resource Use Choices

A wind farm.

Due to scarcity, all societies or economies must answer

The 3 Basic Questions

What goods and services should an economy produce? should the emphasis be on agriculture, manufacturing or services? should it be on sport and leisure or housing? how about education? healthcare? infrastructure?
How should goods and services be produced? labour intensive, land intensive, capital intensive? efficiency? Who should get the goods and services produced? even distribution? more for the rich? more for the poor? more for those who work hard?

Due to scarcity, all societies or economies must answer

The 3 Basic Questions;

continued...

That is, an economic system must decide the allocation of inputs(resources) among producers, the mix of output, and the distribution of output, no matter the scale of the economy and level of development.
All societies are endowed by nature and by previous generations with scarce resources. Every society must decide how to use these inputs to satisfy human wants.

Specifically, resources must be divided up among producers who transform them into goods and services that in turn must be allocated among households or members of society.

Opportunity Cost
Definition the cost expressed in terms of the next best alternative sacrificed Helps us view the true cost of decision making Implies valuing different choices

FOLLOW this LINK: BE_Opportunity Cost.ppt

Production Possibility Frontiers

Show the different combinations of goods and services that can be produced with a given amount of resources No ideal point on the curve Any point inside the curve suggests resources are not being utilised efficiently Any point outside the curve not attainable with the current level of resources Useful to demonstrate economic growth and opportunity cost

Capital Goods

Production Possibility Frontiers Assume a country If the country is

Ym

If it devotes all resources to its capital If it reallocates can produce two at point A on the resources round goods it (moving could types of the PPF A to B) it can PPF Itfrom can produce agoods maximum produce more consumer with its resources of Ym. produce the
goods but only at the capital goods combination of expense of fewer If it devotes allcapital its Yo and consumer goods. The opportunity resources to capital goods and goods cost of producing anit extra consumer goods Xo Xo consumer X1 consumer goods could produce a is Yo Y1 goods capital goods.

Yo

maximum of Xm

Y1

Xo

X1 Xm Consumer Goods

Capital Goods

Production Possibility Frontiers Production

Y1 Yo

A
B

It can only produce at points outside the PPF inside the PPF if it finds a way of e.g. point B expanding its resources improves means or the the productivity of country is not those resources it usinghas. all This its will already resources push the PPF further outwards.

Xo X1

Consumer Goods

Positive and Normative Economics

Health care can be improved with more tax funding Pollution control is effective through a system of fines Society ought to provide homes for all Any strategy aimed at reducing factory closures in deprived areas would be helpful

Positive Statements:
Capable of being verified or refuted by resorting to fact or further investigation

Normative Statements:
Contains a value judgement which cannot be verified by resort to investigation or research

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