Introduction:
Economic Issues
Production Possibilities
The Economic Problem
• Economic problems
– production and consumption
– scarcity: the central economic problem
• Macroeconomic issues
– growth
– unemployment
– inflation
– balance of trade deficits
– cyclical fluctuations
The Economic Problem
• Microeconomic issues
– choices:
• what
• how
• for whom
– the concept of opportunity cost
– rational decision making
• weighing up marginal costs and marginal
benefits
– the social implications of choice
The Economic Problem
• The production possibility curve
– what the curve shows
A production possibility curve
8
Units of food (millions)
7
6
Units of food Units of clothing
(millions)
(millions)
5
4
8m
7m
6m
5m
4m
3m
2m
1m
0
3
2
1
0.0
2.2m
4.0m
5.0m
5.6m
6.0m
6.4m
6.7m
7.0m
0
0
1
2
3
4
5
Units of clothing (millions)
6
7
8
A production possibility curve
8
a
Units of food (millions)
7
6
5
Units of food Units of clothing
(millions)
(millions)
4
a
8m
7m
6m
5m
4m
3m
2m
1m
0
3
2
1
0.0
2.2m
4.0m
5.0m
5.6m
6.0m
6.4m
6.7m
7.0m
0
0
1
2
3
4
5
Units of clothing (millions)
6
7
8
A production possibility curve
8
b
Units of food (millions)
7
6
Units of food Units of clothing
(millions)
(millions)
5
4
8m
7m
6m
5m
4m
3m
2m
1m
0
b
3
2
1
0.0
2.2m
4.0m
5.0m
5.6m
6.0m
6.4m
6.7m
7.0m
0
0
1
2
3
4
5
Units of clothing (millions)
6
7
8
A production possibility curve
8
Units of food (millions)
7
c
6
Units of food Units of clothing
(millions)
(millions)
5
4
8m
7m
6m
5m
4m
3m
2m
1m
0
c
3
2
1
0.0
2.2m
4.0m
5.0m
5.6m
6.0m
6.4m
6.7m
7.0m
0
0
1
2
3
4
5
Units of clothing (millions)
6
7
8
A production possibility curve
8
Units of food (millions)
7
6
Units of food Units of clothing
(millions)
(millions)
5
4
8m
7m
6m
5m
4m
3m
2m
1m
0
3
2
1
0.0
2.2m
4.0m
5.0m
5.6m
6.0m
6.4m
6.7m
7.0m
0
0
1
2
3
4
5
Units of clothing (millions)
6
7
8
A production possibility curve
8
Units of food (millions)
7
6
5
4
3
2
1
0
0
1
2
3
4
5
Units of clothing (millions)
6
7
8
A production possibility curve
8
w
Units of food (millions)
7
x
6
5
4
3
2
1
0
0
1
2
3
4
5
Units of clothing (millions)
6
7
8
The Economic Problem
• The production possibility curve
– what the curve shows
– microeconomics and the p.p. curve:
The Economic Problem
• The production possibility curve
– what the curve shows
– microeconomics and the p.p. curve:
• choices and opportunity cost
The Economic Problem
• The production possibility curve
– what the curve shows
– microeconomics and the p.p. curve:
• choices and opportunity cost
• increasing opportunity cost
Increasing opportunity costs
8
Units of food (millions)
7
x
6
1
5
y
1
2
4
z
3
1
2
1
0
0
1
2
3
4
5
Units of clothing (millions)
6
7
8
The Economic Problem
• The production possibility curve
– what the curve shows
– microeconomics and the p.p. curve:
• choices and opportunity cost
• increasing opportunity cost
– macroeconomics and the p.p. curve:
The Economic Problem
• The production possibility curve
– what the curve shows
– microeconomics and the p.p. curve:
• choices and opportunity cost
• increasing opportunity cost
– macroeconomics and the p.p. curve:
• production within the curve
Making a fuller use of resources
x
Food
Production inside
the production
possibility curve
y
v
O
Clothing
The Economic Problem
• The production possibility curve
– what the curve shows
– microeconomics and the p.p. curve:
• choices and opportunity cost
• increasing opportunity cost
– macroeconomics and the p.p. curve:
• production within the curve
• shifts in the curve
Food
Growth in potential output
Now
O
Clothing
Growth in potential output
Food
5 years’ time
Now
O
Clothing
Food
Growth in potential and actual output
O
Clothing
Growth in potential and actual output
y
Food
x
O
Clothing
The Economic Problem
• The circular flow of income
– firms and households
The circular flow of goods and incomes
The Economic Problem
• The circular flow of income
– firms and households
– goods markets
• real flows: goods and services
The circular flow of goods and incomes
The circular flow of goods and incomes
Goods and services
The Economic Problem
• The circular flow of income
– firms and households
– goods markets
• real flows: goods and services
• money flows: consumer expenditure
The circular flow of goods and incomes
Goods and services
The circular flow of goods and incomes
Goods and services
£
Consumer
expenditure
The Economic Problem
• The circular flow of income
– firms and households
– goods markets
• real flows: goods and services
• money flows: consumer expenditure
– factor markets
The Economic Problem
• The circular flow of income
– firms and households
– goods markets
• real flows: goods and services
• money flows: consumer expenditure
– factor markets
• real flows: services of labour and other factors
The circular flow of goods and incomes
Goods and services
£
Consumer
expenditure
The circular flow of goods and incomes
Goods and services
£
Consumer
expenditure
Services of factors of production (labour, etc)
The Economic Problem
• The circular flow of income
– firms and households
– goods markets
• real flows: goods and services
• money flows: consumer expenditure
– factor markets
• real flows: services of labour and other factors
• money flows: wages and other incomes
The circular flow of goods and incomes
Goods and services
£
Consumer
expenditure
Services of factors of production (labour, etc)
The circular flow of goods and incomes
Goods and services
£
Consumer
expenditure
Wages, rent
dividends, etc.
£
Services of factors of production (labour, etc)
The Economic Problem
• The circular flow of income (cont.)
– macroeconomic issues
• the size of total flows
– microeconomic issues
• individual markets
• choices within goods and factor markets