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The Economic Problem
Opportunity Cost
Production Possibility Frontiers
The Economic Problem
LIMITED RESOURCES
Opportunity Cost
the cost expressed in
terms of the next best
alternative sacrificed
The Economic Problem
ECONOMIC SYSTEMS
Production Possibility Frontiers
Capital Goods
Ym
Yo
A
B
Y1
Xo
Ifthe
it devotes
all
country
IfIf
it
reallocates
its is
Assume
a
country
resources
to capital
resources
(moving
at
point
A
on
the
can
produce
two
goods
it
could
round
thecan
PPF from A
PPF
It
types
of
aproduce
maximum
to produce
B) it cangoods
produce
the goods
of Ym.
with
its resources
more
consumer
–Ifcapital
combination
but
only
at goods
the allof
it devotes
itsYo
expense
of
fewer
and
consumer
capital
goods
and
resources
to
capital
goods.
The it
goods
consumer
goods
Xo
consumer
opportunity
cost a
of
could produce
goods
producing
anof
extra
maximum
Xm Xo
– X1 consumer goods
is Yo – Y1 capital
goods.
X1 Xm Consumer Goods
Production Possibility
Frontiers
Production
Capital Goods
C
Y1
Yo
.
A
It can only produce at
points outside the PPF
ifinside
it finds the
a way
of
PPF
expanding its
– e.g. point B
resources or improves
means
the of
the
productivity
those
resources
it
country
is not
already
This will
using has.
all its
push the PPF further
resources
outwards.
B
Xo X1
Consumer Goods
What makes the PPF move outwards?
Positive and Normative Economics
• Health care can be improved with more
tax funding
• Pollution control is effective through a
system of fines
• Positive
Statements:
• Society ought to provide homes for all
• Any strategy aimed at reducing factory
closures in deprived areas would be
helpful
• Normative
Statements:
– Capable of being verified
or refuted by resorting to
fact or further
investigation
– Contains a value judgement
which cannot be verified by
resort to investigation or
research
Micro & Macro economics
• The field of economics that
• The branch of economics
studies the behavior of the
that analyzes the market
aggregate economy.
behavior of individual
Macroeconomics examines
consumers and firms in an economy-wide phenomena
attempt to understand the such as changes in
decision-making process of unemployment, national
firms and households.
income, rate of growth, gross
domestic product, inflation
and price levels.
Economic Development
• Economic development is a measure
of welfare, a measure of well-being.
• Commonly used measure is Human
Development Index (HDI).
• Measures national income power
head, adult literary rate, average
years of schooling, life expectancy
Category
HDI Value
High Human development
.800 and above
Medium human development
.500 -0.799
Low human development
Less than .500
Sustainable Development
• Development that meets
the needs of the present
without compromising the
ability of future
generations to meet their
own needs.
• Countries should not
use up resources too
quickly and should not
harm the environment
since this will stop
growth taking place in
the future.
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