Economics with Taxation and Agrarian Reform

Basic Problems of
Economics
o 3 Basic Economic Questions

v What commodities are produced and in

what questions?

• people need to make wise decisions on how

they will use them by knowing what
commodities are in need/demand for the
majority of people’s economic satisfaction

v How are goods produced?

• a society must determine the factors of

production---who will do the production,
with what resources, and what techniques
will they use

v For whom are goods produced?

• Who are the beneficiaries of the products

that will be produced?

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 Economics with Taxation and Agrarian Reform

Basic Problems of
Economics
o Opportunity Cost

v refers to the value of the good or service

foregone

v decisions have opportunity costs because

choosing one thing in a world of scarcity
means giving up something else

• Example: seeing a movie

v opportunity cost vs. accounting cost

If a shipwrecked sailor on a desert

island is capable of catching ten
fish or harvesting five coconuts in
a day, then the opportunity cost of
producing one coconut is two fish
(10 fish per 5 coconuts)

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 Economics with Taxation and Agrarian Reform

Basic Problems of
Economics
o Production Possibility Frontier

v the economy is actually deciding how to

allocate its resources among thousands of
different possible commodities and
services

v PPF – shows the maximum amounts of

production that can be obtained by an
economy (depending of course on its
technological knowledge and quantity of
inputs available)

v the analysis of PPF illustrates the key

economic idea of scarcity which requires
choices and trade-offs in answering the
questions of what, how and for whom

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 Economics with Taxation and Agrarian Reform

Basic Problems of
Economics
o Production Possibility Frontier

v the initial analysis is based on the

following assumptions:

• given amount of resources

• full employment of all those resources
• fixed technology

v combinations of outputs that are not

previously possible become possible, costs
of production can be further lowered and
the shapes of the curves can change and
shift

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 Economics with Taxation and Agrarian Reform

Basic Problems of
Economics
o Production Possibility Frontier

v the following table (Table 1) shows a

schedule of possible combinations of both
food and lumber

Table 1

ALTERNATIVE PRODUCTION OF FOOD AND

LUMBER
Food (millions Lumber
Schedule
of pounds) (thousands)
A 0 15
B 1 14
C 2 12
D 3 9
E 4 5
F 5 0

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 Economics with Taxation and Agrarian Reform

Basic Problems of
Economics
Figure 2. Alternative Production of
Food and Lumber

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 Economics with Taxation and Agrarian Reform

Basic Problems of
Economics
o Production Possibility Frontier

v productive efficiency occurs when

production of one good cannot be
increased without curtailing production of
another good

• economic growth pushes out or shifts the

frontier to the right
• how a nation chooses relatively less food
and other necessities as it develops
• how a country chooses between private
goods and public goods
• how societies choose between consumption
goods and capital goods that enhance future
consumption

v when a society is inside their PPF (point X1

in Figure 2), this means that the economy
is performing inefficiently

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