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Introduction to
The Economic Problem
   Opportunity Cost
 Production Possibility

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            The Economic Problem
                                     • Unlimited Wants
                                     • Scarce Resources
                                       – Land, Labour,
                                     • Resource Use
                                     • Choices

A wind farm. Copyright:

                                                 Copyright 2006 – Biz/ed

     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
• 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
Capital Goods
              Frontiers          If it devotes all
                           If the country is
                            Assume a country
                                 resources to capital
                                If it reallocates its
                                 can produce the
                                at pointcould two
                                 goods it A on
                                resources (moving round
          Ym                     types can to B)
                                PPF It ofagoods it can
                                the PPF frommaximum
                                 with its the
                                produce more consumer
                                 of Ym.
                                goods but only at the
                                 – capital goods
                                combination capital
                                expense of fewer of Yo
                                 If it devotes all its
          Yo              A      and The opportunity
                                goods.consumer and
                                capital goods
                                 resources to
                                 consumer goods extra
                                cost of producing an it
                                Xo– consumer goods
                                Xo X1 consumer
                                 could produce a
                                is Yo – Y1 capital goods.
                                    maximum of Xm

          Y1                    B

                         Xo   X1 Xm Consumer Goods

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      Production Possibility
Capital Goods
                                  It can only produce at
                                  points outside the PPF
                                     inside the PPF
                                  if it finds a way of
                                     – e.g. its
                                  expandingpoint B
                                     means the
                                  resources or improves

                             C    the productivity of
                                     country is not
                                  those resources it
                                     using all its
                         A        already has. This will

          Yo                         resources
                                  push the PPF further


                        Xo X1      Consumer Goods

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      Positive and Normative
• Health care can be          • Positive Statements:
  improved with more tax        – Capable of being
  funding                         verified or refuted by
• Pollution control is            resorting to fact or
  effective through a             further investigation
  system of fines             • Normative
• Society ought to provide      Statements:
  homes for all                 – Contains a value
• Any strategy aimed at           judgement which
                                  cannot be verified by
  reducing factory closures
                                  resort to investigation
  in deprived areas would         or research
  be helpful

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Description: a guide to intro to economics