http://www.bized.ac.uk Introduction to Economics The Economic Problem Opportunity Cost Production Possibility Frontiers Copyright 2005 – Biz/ed http://www.bized.ac.uk The Economic Problem • Unlimited Wants • Scarce Resources – Land, Labour, Capital • Resource Use • Choices A wind farm. Copyright: Getty Images, available from Education Image Gallery Copyright 2005 – Biz/ed http://www.bized.ac.uk The Economic Problem • 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? Copyright 2005 – Biz/ed http://www.bized.ac.uk 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 Copyright 2005 – Biz/ed http://www.bized.ac.uk 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 Copyright 2005 – Biz/ed http://www.bized.ac.uk Production Possibility Frontiers a country IfAssume the country is If it devotes all to its capital Ifresources it reallocates can produce at point A ontwo 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 resources of Ym.its produce the Capital Goods Ym Yo A goods but only at the – capital goods combination of expense of fewer If it devotes allcapital its Yo and consumer goods. Thegoods opportunity resources to capital and goods cost of producing anitextra consumer goods Xo Xo – consumer X1 consumer goods could produce a is Yo – Y1 goods capital goods. maximum of Xm B Y1 Xo X1 Xm Consumer Goods Copyright 2005 – Biz/ed http://www.bized.ac.uk Production Possibility Frontiers Production Capital Goods C Y1 Yo . A 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. B Xo X1 Consumer Goods Copyright 2005 – Biz/ed http://www.bized.ac.uk 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 Copyright 2005 – Biz/ed http://www.bized.ac.uk 3 Economic Systems • Traditional – By Birth • Command – I command you to make goods and services • Market – Determined by Price $$ Copyright 2005 – Biz/ed