# Chapter 2: THE ECONOMIC PROBLEM

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```					   Chapter 2: THE
ECONOMIC PROBLEM
ECONOMICS 11- UPLB
How would you choose
to use or allocate…
• 6 hours to study for Math, English and Econ
exams?
• Php 100 of your daily allowance?
• 5 hectares of agricultural land?
• Php 50 million of CDF if you were the Governor
• Php 1 trillion budget for the Filipino people?
Scarcity of resources: Economic Problem
Problem of Choice
The Basic Economic Questions
    What to produce?
    How much to produce?
    How to produce?
    For whom to produce?
The basic economic questions
(a) What to produce?
- Do we produce everything in this country? If not, which goods will we
produce here and which goods will we import?

(b) How much to produce?
- Once we have decided what goods to produce, next question: How much of
each good will we produce?

(c) How to produce?
- Suppose we have decided on quantities of goods that will be produced. next
question: what techniques to use in production?

(d)   For whom to produce?
- Who benefits from the goods that were produced?
Technological Choices and the Production
Possibilities Frontier (PPF)
   PPF  a tool useful for illustrating choices
available to society and its constraints
   PPF  all the possible combinations of the
maximum amounts of two goods and
services that can be produced with a given
amount of resources
Assumptions about the PPF

   Only two goods are produced: food (F) and
clothing (C)
   The society has limited resources (in fixed
supply)
   Aside # 1: can assume that the resources are
land, labor, and capital
   Aside # 2: capital  physical capital like
machinery, buildings, etc.
Example of PPF: all resources used
OC or rate

FOOD CLOTHING F C            C
F
(F)    (C) Specializing in
clothing prodn
A     0    1000
B    100    950          100 -50 -0.5
C    200    850          100 -100 -1
D    300    650 Speciali 100 -200 -2.0
E    400    400 -zing 100 -250 -2.5
in food
F    500     0 prodn 100 -400 -4
Notes on the PPF (1)
(1)   Interpretation of points, say pt. D:
   If we use all resources, we can produce at most
300 units of Food and 650 units of Clothing
   If we want to  Food prodn, must Clothing
(3)   Opportunity Cost of Food
   amount of Clothing that must be given up to
produce an extra unit of Food
   Between points A and B, OC of F is 0.5
Notes on the PPF (2)
(4)   Opportunity cost
   the value of the best foregone alternative
(5)   Rate of trade-off is increasing
   in absolute value  increasing opportunity cost
of F
(6)   Implication
   As we produce more of F, it gets harder to
substitute F for C
Graphical Illustration of PPF
C           Pts on the PPF are efficient-
fully employed resources using
1,200                 best technology
A
1,000           B
Unattainable or
C                           infeasible given current
800                                                       resources and
Unemployment              D                      technology
600         of resources
I                     E        N
400
200
F
0                                                                  F
0    100        200        300          400      500
Does PPF answer Basic Econ Questions?
   What to produce?
   Shown by 2 goods on axes of PPF
   How much to produce?
   Shown by points along PPF
   How to produce?
   Use technology that will enable economy to
produce goods represented by points along PPF
   For whom to produce?
   Not shown by PPF
 in resources and/or techno
Shifts in PPF     improvements leads to an
outward shift in the PPF
C                       in resources and/or techno
improvements in clothing
production only

 in resources and/or techno
improvements in food
production only

in resources and/or
techno improvements
of both F and C prodn

0                                                    F
Economic Systems &
The Basic Economic Questions
2 extreme economic systems

• complete command economy
 decisions made by “authorities”

• completely unregulated market economy
 market is the institution that determines