Introduction:Economic Issues

Production Possibilities

The Economic Problem

• Economic problems– production and consumption– scarcity: the central economic problem

• Macroeconomic issues– growth– unemployment– inflation– balance of trade deficits– cyclical fluctuations

The Economic Problem

• Microeconomic issues– choices:

• what• how• for whom

– the concept of opportunity cost– rational decision making

• weighing up marginal costs and marginal benefits

– the social implications of choice

The Economic Problem

• The production possibility curve– what the curve shows

0

1

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6

7

8

0 1 2 3 4 5 6 7 8Units of clothing (millions)

Uni

ts o

f foo

d (m

illio

ns)

Units of food Units of clothing (millions) (millions)

8m 0.0 7m 2.2m 6m 4.0m 5m 5.0m 4m 5.6m 3m 6.0m 2m 6.4m 1m 6.7m 0 7.0m

A production possibility curve

0

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7

8

0 1 2 3 4 5 6 7 8Units of clothing (millions)

Uni

ts o

f foo

d (m

illio

ns)

Units of food Units of clothing (millions) (millions)

a 8m 0.0 7m 2.2m 6m 4.0m 5m 5.0m 4m 5.6m 3m 6.0m 2m 6.4m 1m 6.7m 0 7.0m

aA production possibility curve

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6

7

8

0 1 2 3 4 5 6 7 8Units of clothing (millions)

Uni

ts o

f foo

d (m

illio

ns)

Units of food Units of clothing (millions) (millions)

8m 0.0b 7m 2.2m 6m 4.0m 5m 5.0m 4m 5.6m 3m 6.0m 2m 6.4m 1m 6.7m 0 7.0m

b

A production possibility curve

0

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7

8

0 1 2 3 4 5 6 7 8Units of clothing (millions)

Uni

ts o

f foo

d (m

illio

ns)

Units of food Units of clothing (millions) (millions)

8m 0.0 7m 2.2mc 6m 4.0m 5m 5.0m 4m 5.6m 3m 6.0m 2m 6.4m 1m 6.7m 0 7.0m

c

A production possibility curve

0

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7

8

0 1 2 3 4 5 6 7 8Units of clothing (millions)

Uni

ts o

f foo

d (m

illio

ns)

Units of food Units of clothing (millions) (millions)

8m 0.0 7m 2.2m 6m 4.0m 5m 5.0m 4m 5.6m 3m 6.0m 2m 6.4m 1m 6.7m 0 7.0m

A production possibility curve

0

1

2

3

4

5

6

7

8

0 1 2 3 4 5 6 7 8Units of clothing (millions)

Uni

ts o

f foo

d (m

illio

ns)

A production possibility curve

0

1

2

3

4

5

6

7

8

0 1 2 3 4 5 6 7 8Units of clothing (millions)

Uni

ts o

f foo

d (m

illio

ns)

x

A production possibility curve

w

The Economic Problem

• The production possibility curve– what the curve shows– microeconomics and the p.p. curve:

The Economic Problem

• The production possibility curve– what the curve shows– microeconomics and the p.p. curve:

• choices and opportunity cost

The Economic Problem

• The production possibility curve– what the curve shows– microeconomics and the p.p. curve:

• choices and opportunity cost• increasing opportunity cost

Units of clothing (millions)

Uni

ts o

f foo

d (m

illio

ns)

Increasing opportunity costs

x

y

0

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0 1 2 3 4 5 6 7 8

1

1

z1

2

The Economic Problem

• The production possibility curve– what the curve shows– microeconomics and the p.p. curve:

• choices and opportunity cost• increasing opportunity cost

– macroeconomics and the p.p. curve:

The Economic Problem

• The production possibility curve– what the curve shows– microeconomics and the p.p. curve:

• choices and opportunity cost• increasing opportunity cost

– macroeconomics and the p.p. curve:• production within the curve

v

x

y

O

Making a fuller use of resourcesFo

od

Clothing

Production insidethe production

possibility curve

The Economic Problem

• The production possibility curve– what the curve shows– microeconomics and the p.p. curve:

• choices and opportunity cost• increasing opportunity cost

– macroeconomics and the p.p. curve:• production within the curve• shifts in the curve

O

Growth in potential outputFo

od

Clothing

Now

O

Food

Clothing

Now

Growth in potential output

5 years’ time

O

Food

Clothing

Growth in potential and actual output

O

Food

Clothing

Growth in potential and actual output

xy

The Economic Problem

• The circular flow of income– firms and households

The circular flow of goods and incomes

The Economic Problem

• The circular flow of income– firms and households– goods markets

• real flows: goods and services

The circular flow of goods and incomes

The circular flow of goods and incomesGoods and services

The Economic Problem

• 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 incomesGoods and services

Goods and services

£Consumer

expenditure

The circular flow of goods and incomes

The Economic Problem

• The circular flow of income– firms and households– goods markets

• real flows: goods and services• money flows: consumer expenditure

– factor markets

The Economic Problem

• 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

Goods and services

£Consumer

expenditure

The circular flow of goods and incomes

Goods and services

£Consumer

expenditure

Services of factors of production (labour, etc)

The circular flow of goods and incomes

The Economic Problem

• 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

Goods and services

£Consumer

expenditure

Services of factors of production (labour, etc)

The circular flow of goods and incomes

Goods and services

£Consumer

expenditure

Wages, rentdividends, etc.

£

Services of factors of production (labour, etc)

The circular flow of goods and incomes

The Economic Problem

• The circular flow of income (cont.)– macroeconomic issues

• the size of total flows

– microeconomic issues• individual markets• choices within goods and factor markets