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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

A wind farm. Copyright: iStock.com

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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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Capital Goods

Production Possibility Frontiers Assume a country If the country is

Ym

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If it devotes all resources to capital If it reallocates its can produce the at pointcould two resources (moving round goods it A on types can to B) the PPF from maximum A PPF It ofagoods it can produce produce more consumer with its the of Ym. produceresources
goods but only at the capital goods combination capital expense of fewer of Yo If it devotes all its and The opportunity goods.consumer and resources to capital goods goods cost of producing anit consumer goods extra Xo consumer goods Xo X1 consumer could produce a is Yo Y1 capital goods. goods

Yo

maximum of Xm

Y1

Xo

X1 Xm Consumer Goods
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Capital Goods

Production Possibility Frontiers Production

Y1 Yo

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A
B

It can only produce at points outside the PPF inside the PPF if it finds a way of e.g. its expandingpoint B resources or improves means the the productivity of country is not those resources it using all its already has. This will resources push the PPF further outwards.

Xo X1

Consumer Goods
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Positive and Normative Economics

Health care can be improved with more tax funding Pollution control is effective through a system of fines Society ought to provide homes for all Any strategy aimed at reducing factory closures in deprived areas would be helpful

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Positive Statements:
Capable of being verified or refuted by resorting to fact or further investigation

Normative Statements:
Contains a value judgement which cannot be verified by resort to investigation or research

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