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Introduction to
Economics
The Economic Problem
Opportunity Cost
Production Possibility
Frontiers
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The Economic Problem
• Unlimited Wants
• Scarce Resources
– Land, Labour,
Capital
• Resource Use
• Choices
A wind farm. Copyright: Getty Images,
available from Education Image Gallery
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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?
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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
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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
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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
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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
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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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3 Economic Systems
• Traditional – By Birth
• Command – I command you to
make goods and services
• Market – Determined by Price $$
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