Download A production possibility curve

Introducing
Economics
Introducing Economics
What do Economists Study?
What do Economists Study?
 Economic problems
 production and consumption
 Scarcity: the central economic problem
 defining scarcity
 use of resources (factors of production)
 labour
 land
and raw materials
 capital

demand and supply
 importance
of reconciling demand and supply
 actual and potential demand and supply
What do Economists Study?
 Macroeconomic issues

growth

unemployment

inflation

balance of payments problems

cyclical fluctuations
What do Economists Study?
 Microeconomic issues
choices: what, how and for whom
 the concept of opportunity cost
 rational economic decision making

 marginal
costs and marginal benefits
> MB  do more
 MC > MB  do less
 MC

microeconomic objectives
 efficiency
 equity
What do Economists Study?
 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
What do Economists Study?
 The production possibility curve
what the curve shows
 microeconomics and the production possibility
curve:

What do Economists Study?
 The production possibility curve
what the curve shows
 microeconomics and the production possibility
curve:

 choices
and opportunity cost
Increasing opportunity costs
8
Units of food (millions)
7
x
6
1
5
y
1
4
3
2
1
0
0
1
2
3
4
5
Units of clothing (millions)
6
7
8
What do Economists Study?
 The production possibility curve
what the curve shows
 microeconomics and the production possibility
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
What do Economists Study?
 The production possibility curve
what the curve shows
 microeconomics and the production possibility
curve:

 choices
and opportunity cost
 increasing opportunity cost

macroeconomics and the production possibility
curve:
What do Economists Study?
 The production possibility curve
what the curve shows
 microeconomics and the production possibility
curve:

 choices
and opportunity cost
 increasing opportunity cost

macroeconomics and the production possibility
curve:
 production
within the curve
Making a fuller use of resources
x
Food
Production inside
the production
possibility curve
y
v
O
Clothing
What do Economists Study?
 The production possibility curve
what the curve shows
 microeconomics and the production possibility
curve:

 choices
and opportunity cost
 increasing opportunity cost

macroeconomics and the production possibility
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
What do Economists Study?
 The circular flow of income

firms and households
The circular flow of goods and incomes
What do Economists Study?
 The circular flow of income
firms and households
 goods markets

 real
flows: goods and services
The circular flow of goods and incomes
Goods and services
What do Economists Study?
 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
£
Consumer
expenditure
What do Economists Study?
 The circular flow of income
firms and households
 goods markets

 real
flows: goods and services
 money flows: consumer expenditure

factor markets
What do Economists Study?
 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
Services of factors of production (labour, etc)
What do Economists Study?
 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
Wages, rent
dividends, etc.
£
Services of factors of production (labour, etc)
What do Economists Study?
 The circular flow of income (cont.)

macroeconomic issues
 the

size of total flows
microeconomic issues
 individual
markets
 choices within goods and factor markets
Introducing Economics
Economic Systems
Economic Systems
 Classifying economic systems
methods of classification
 classification by degree of government control

Classifying economic systems
Totally
planned
economy
Totally
free-market
economy
Classifying economic systems
Mid 1980s
Totally
planned
economy
N. Korea China
Poland
Cuba
UK
France
USA
Hong
Kong
Totally
free-market
economy
Classifying economic systems
Mid 1980s
Totally
planned
economy
N. Korea China
Poland
Cuba
UK
France
USA
Hong
Kong
Totally
free-market
economy
N. Korea
Cuba
China
Poland France
USA
UK
China
(Hong
Kong)
Late 2000s
Economic Systems
 Classifying economic systems
methods of classification
 classification by degree of government control
 other methods of classification

 The command economy
features of a command economy
 planning:

 consumption
and investment
 matching of inputs and outputs
 distribution of output
Economic Systems
 Advantages of a command economy
high investment, high growth
 stable growth
 social goals pursued
 low unemployment

 Problems of a command economy
problems of gathering information
 expensive to administer
 inappropriate incentives
 shortages and surpluses

Economic Systems
 The free-market economy
demand and supply decisions
 the price mechanism:

 shortages
and surpluses
 equilibrium price
 response to changes in demand and supply
The price mechanism:
the effect of a rise in demand
Goods Market
Dg
shortage
(Dg > Sg)
Pg
Sg
Dg
until Dg = Sg
The price mechanism:
the effect of a rise in demand
Goods Market
Dg
shortage
(Dg > Sg)
Sg
Pg
Dg
until Dg = Sg
Factor Market
Sg
Df
shortage
(Df > Sf)
Pf
Sf
until Df = Sf
Df 
Economic Systems
 The free-market economy
demand and supply decisions
 the price mechanism:

 shortages
and surpluses
 equilibrium price
 response to changes in demand and supply

the interdependence of markets
The price mechanism:
the effect of a rise in demand
Goods Market
Dg
shortage
(Dg > Sg)
Sg
Pg
Dg
until Dg = Sg
Factor Market
Sg
Df
shortage
(Df > Sf)
Pf
Sf
until Df = Sf
Df 
Economic Systems
 Advantages of a free-market economy

transmits information between buyers and sellers

no need for costly bureaucracy

incentives to be efficient

competitive markets responsive to consumers
Economic Systems
 Problems of a free-market economy

competition may be limited: problem of market
power

inequality

the environment and other social goals may be
ignored
 The mixed economy
Introducing Economics
The Nature of Economic Reasoning
The Nature of Economic Reasoning
 Economics as a science

models in economics

building models

using models

assessing models
 Economics as a social science

difficulties in conducting controlled experiments in
many parts of the subject

problems of predicting human behaviour
The Nature of Economic Reasoning
 Economics and policy

positive and normative economics

the role of the economist in policy making

the use and abuse of economics