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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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