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Problem 1: • What commodities are to be produced and in what quantities? • How much of each of the many possible goods and services should the economy make? • And when will they be produced?
Problem 2: • How shall goods be produced? • By whom and with what resources and in what technological manner are they to be produced? • Are goods be produced by hand or with machineries?
Problem 3: • For whom shall goods be produced? • Who gets to eat the fruit of the economy’s efforts? • How is the product to be divided among different households?
Different approaches in solving the above issues/problems:
• Inputs (Factors of production) – 1) Land, 2) Labour and 3) Capital resources. 1) Land – Natural resources 2) Labour – human time spent in production 3) Capital resources – machines, computers, hammers, trucks, automobiles etc.,
Formulation of Societies
• Market Economy or Free-market or laissezfaire economy makes decisions on an individual level with minimal government intervention. • Planned Economy or Command Economy where all economic decisions are made by the government (Sloman, 2001).
• Takes the initiative in combining the resources of land, labour, and capital • Makes strategic business decisions • Is an innovator • Commercializes new products, new production techniques, and even new forms of business organization • Takes risk to get profits
Production Possibilities Frontier
• Society uses its scare resources to produce goods and services • The alternatives and choices it faces can best be understood through macro economic model • We assume: 1. Full employment 2. Fixed Resources 3. Fixed Technology and 4. Two goods
Production Alternatives Type of Product Food Products (thousands) Manufacturing equipment (thousands) A 0 B 1 C 2 D 3 E 4
• • • • Use of Resources Production Techniques Consumption Wants and demand
10 9 8 7 6 5 4 3 2 1 0 1
Production possibilities curve
Law of increasing opportunity cost
• More foods means less manufacturing equipments • The number of units of manufacturing equipment that must be given up to obtain another unit of food products – is the opportunity cost of that unit of food products
• A-B: 1 unit of manufacturing is scarified for 1 more unit of food products • B-C: We sacrifice 2 additional units of manufacturing equipment for 1 more unit of food products • C-D: 3 more additional units of manufacturing equipments for 1 unit of food product • D-E: 4 more additional units of manufacturing equipments for 1 unit of food product
Advances in Technology
Production Alternatives Type of Product Food Products (thousands) Manufacturing equipment (thousands) A 0 B 2 C 4 D 6 E 8
Putting the PPF to work
• Before development, the nation is poor. It must devote almost all its resources to food and and enjoy few comforts • PPF provides a rigorous definition of scarcity • How societies choose among different patterns of output, how they pay for their choices, and how they benefit or lose • PPF answers for what, how and whom