Introduction:

Economic Issues
 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
 A production possibility curve
8

6
Units of food (millions)

5 Units of food Units of clothing

(millions) (millions)

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

0
0 1 2 3 4 5 6 7 8
Units of clothing (millions)
 A production possibility curve
8
a
7

6
Units of food (millions)

5 Units of food Units of clothing

(millions) (millions)

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

0
0 1 2 3 4 5 6 7 8
Units of clothing (millions)
 A production possibility curve
8

7
b

6
Units of food (millions)

5 Units of food Units of clothing

(millions) (millions)

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

0
0 1 2 3 4 5 6 7 8
Units of clothing (millions)
 A production possibility curve
8

c
6
Units of food (millions)

5 Units of food Units of clothing

(millions) (millions)

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

0
0 1 2 3 4 5 6 7 8
Units of clothing (millions)
 A production possibility curve
8

6
Units of food (millions)

5 Units of food Units of clothing

(millions) (millions)

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

0
0 1 2 3 4 5 6 7 8
Units of clothing (millions)
 A production possibility curve
8

6
Units of food (millions)

0
0 1 2 3 4 5 6 7 8
Units of clothing (millions)
 A production possibility curve
8

7 w
x
6
Units of food (millions)

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

x
6
Units of food (millions)

1 y
5
1

4 2

3
z
1

0
0 1 2 3 4 5 6 7 8
Units of clothing (millions)
 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
 Making a fuller use of resources

x
Production inside
Food

the production y
possibility curve

O
Clothing
 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
 Growth in potential output
Food

Now

O
Clothing
 Growth in potential output

5 years’ time
Food

Now

O
Clothing
 Growth in potential and actual output
Food

O
Clothing
 Growth in potential and actual output

y
x
Food

O
Clothing
 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 incomes
Goods 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 incomes
Goods and services
The circular flow of goods and incomes
Goods and services

£
Consumer
expenditure
 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
The circular flow of goods and incomes
Goods and services

£
Consumer
expenditure
The circular flow of goods and incomes
Goods and services

£
Consumer
expenditure

Services of factors of production (labour,

 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

The circular flow of goods and incomes
Goods and services

£
Consumer
expenditure

Services of factors of production (labour,

The circular flow of goods and incomes
Goods and services

£
Consumer
expenditure

Wages, rent
dividends, etc.
£

Services of factors of production (labour,

 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