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Introduction to
Economics
The Economic Problem
Opportunity Cost
Production Possibility
Frontiers

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The Economic Problem

• Unlimited Wants
• Scarce Resources
– Land, Labour,
Capital
• Resource Use
• Choices

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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
making
• 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 IfAssumeIf it devotes all
the country is
a country
Ifresources to capital
it reallocates its
atcan produce
point A
goods it (moving
resources on two
the
could round
Ym types
PPF
the PPF
produce ofagoods
Itfrom
can A to B) it can
maximum
with
of Ym.its
produce
produce resources
more
theconsumer
goods but only
– capital at the
goods
combination
If it devotes
expense of
its Yo
allcapital
of fewer
A and
goods. consumer
Thegoods
opportunity
Yo capital
resources
goods
cost of
to
producing
and
anitextra
consumer goods
Xo
Xo – consumer
X1 consumer goods
could produce a
goods capital goods.
is Yo – Y1
maximum of Xm

Y1 B

Xo X1 Xm Consumer Goods

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

Y1
C the productivity
country of
is not
those resources it
usinghas.all This
its will
A already

.
Yo resources
push the PPF further
outwards.

Xo X1 Consumer Goods

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Positive and Normative

Economics
• 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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