 The Economic Problem
 Opportunity Cost
 Production Possibility Frontiers
What is Economics?
 Nobel Prize Laureate Paul Samuelson's definition is as
follows:
 “Economics is the study of how societies use scarce
resources to produce valuable commodities and
distribute them among different people.”
Microeconomics
 – studies the interaction of individual components, the
consumers and producers in the market; e.g., demand
and supply, elasticity, costs of production of
businesses.
www.eportfolio.lagcc.cuny.edu/.../SSE103.html
Macroeconomics
 – studies the functioning of the economy as a whole;
e.g., taxation, Government spending, and changes in
the money supply, interest rates, inflation rates and
exchange rates.
http://www.obamatoon.c
om/photos/uncategorized
/2008/11/16/20081120ob
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Normative vs. Positive Economics
 Positive Economics – Describes facts in the economy.
For example: Inflation is caused by an increase in the
aggregate demand for goods and services.
 Normative Economics – involves value judgments.
For example: The government should tax higher
income earners more than lower income earners.
What is the difference in the
following statements?

Arabianbusiness.com Friday, 29 August 2008
 The dirham should be de-pegged immediately," said
Khalaf Al-Habtoor, chairman of conglomerate AlHabtoor Group."The implications of the dollar peg have
really begun to affect business and markets."

http://www.arabianbusiness.com/505874-depeg-immediately-urge-uae-businesses
 The UAE is among four states in the GCC - including
Saudi Arabia, Qatar and Bahrain - that are maintaining
dollar pegs until they negotiate a single currency as early
as 2010.

http://www.arabianbusiness.com/516145-uae-fx-committee-recommends-sticking-with-dlr-peg
Examine these pictures
The Fundamental Economic Problem
 Unlimited Wants
 Scarce Resources
TROPICAL TROUBLE EXERCISE
Three Fundamental Questions of
Economics
 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 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? for those who
work hard?
The Three Basic Economic Questions
 How does a market economy decide:
 WHAT to produce?
 HOW to produce the goods and services?
 FOR WHOM to produce the goods and services?
Factors of Production
 Factors of production are the inputs or
resources used to produce output
(goods and services).
Land
anything that comes from the geographical
surface of the earth.
Land’s reward is rent.
Labor
all the mental and physical effort used in
producing goods and services
Labor’s reward is wages.
Capital
all man-made resources used to produce
goods and services.
Capital’s reward is interest.
Enterprise
the individual(s) who come up with the
business idea, take the risk and organize the
other factors.
Enterprise’s return is profit.
The workings of a Market Economy
 How do businesses decide:
 WHAT to produce?
 HOW to produce the goods and services?
 WHO gets the goods and services?
The Circular Flow of Income Model
Circular Flow of Income with
Government and International Trade
Choice and Opportunity Cost
Opportunity Cost
 Opportunity Cost is the best , or most valued,
alternative you give up when making an
economic decision.
Choice? Opportunity cost?
Choice? Opportunity Cost?
Choice? Opportunity Cost?
Choice? Opportunity Cost?
Production Possibilities Curves
(PPC)
 A PPC shows the combinations of goods and services
that an economy can produce using all its resources
fully.
EUROLAND’S PPC
Euro Land's PPC
Production
Possibilities
A
B
C
D
E
Cars (000)
16
12
8
4
0
Mobile
phones (000)
0
12
24
36
48
Constant Opportunity Cost & PPC
 EURO LAND’S PPC - A straight line PPC shows
constant opportunity cost.
CARS
(000s)
C
8
D
4
24
36
Mobile Phones
(000s)
PPC & Constant Opportunity Cost
JAPAN’S PPC
Japan's PPC
Production
Possibilities
A
B
C
D
E
F
Capital
Goods (000)
0
1
2
3
4
5
Consumer
Goods (000)
500
475
425
325
175
0
PPC & Increasing Opportunity
Cost : JAPAN’S PPC
Capital Goods
(000s)
3
D
C
2
325
425
Consumer Goods
(000s)
Discuss the points and the following PPC
I
Why is the PPC bowed out from the origin?
 The PPC is bowed out from the origin
b/c of increasing opportunity cost.
Opp cost increases b/c to get more of
one good an econ. has to give up more
and more of the other good b/c
resources are NOT equally efficient at
producing both goods.
PPC and Economic Growth
 Improve quality of resources; i.e., training & education
 Increase quantity of resources;i.e., discovery of new oil
reserves
 Technology to increase productivity
 Increase # of women in the workforce
 More Research & Development (R & D)
 Produce more capital goods today
PPC and Economic Growth
Capital Goods
Y1
Yo
C
.
A
B
Xo X1
Consumer Goods
BENEFITS OF TRADE
Trade between nations allows
countries to OBTAIN
combinations of resources that
are greater than they can
produce.
Trade does NOT mean economic
growth.
Summary: 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
Review
1) Complete the Problems for LO1
2) Applying your Knowledge and Understanding
Read the passages and:
Look up any new vocabulary words.
Apply the concepts learned in LO1
REVIEW PROBLEMS
Review Problem
Production
Possibilities
Cars
x-axis
Computers
y-axis
A
16
0
B
12
16
C
8
28
D
4
36
E
0
40