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

8 7 6 5 4 3 2 1 0 0 1

A production possibility curve

Units of food (millions)

Units of food Units of clothing (millions) (millions) 8m 7m 6m 5m 4m 3m 2m 1m 0 0.0 2.2m 4.0m 5.0m 5.6m 6.0m 6.4m 6.7m 7.0m

2

Units of clothing (millions)

3

4

5

6

7

8

8

A production possibility curve a

7 6 5 4 3 2 1 0 0 1 2

Units of food (millions)

Units of food Units of clothing (millions) (millions) a 8m 7m 6m 5m 4m 3m 2m 1m 0 0.0 2.2m 4.0m 5.0m 5.6m 6.0m 6.4m 6.7m 7.0m

Units of clothing (millions)

3

4

5

6

7

8

8 7 6 5 4

A production possibility curve b

Units of food (millions)

Units of food Units of clothing (millions) (millions) b 8m 7m 6m 5m 4m 3m 2m 1m 0 0.0 2.2m 4.0m 5.0m 5.6m 6.0m 6.4m 6.7m 7.0m

3 2 1 0 0 1

2

Units of clothing (millions)

3

4

5

6

7

8

8 7 6 5 4 3 2 1 0 0 1

A production possibility curve

c
Units of food Units of clothing (millions) (millions) 8m 7m 6m 5m 4m 3m 2m 1m 0 0.0 2.2m 4.0m 5.0m 5.6m 6.0m 6.4m 6.7m 7.0m

Units of food (millions)

c

2

Units of clothing (millions)

3

4

5

6

7

8

8 7 6 5 4 3 2 1 0 0 1

A production possibility curve

Units of food (millions)

Units of food Units of clothing (millions) (millions) 8m 7m 6m 5m 4m 3m 2m 1m 0 0.0 2.2m 4.0m 5.0m 5.6m 6.0m 6.4m 6.7m 7.0m

2

Units of clothing (millions)

3

4

5

6

7

8

8 7 6 5 4 3 2 1 0 0 1

A production possibility curve

Units of food (millions)

2

Units of clothing (millions)

3

4

5

6

7

8

8 7 6 5 4 3 2 1 0 0 1

A production possibility curve w

x

Units of food (millions)

2

Units of clothing (millions)

3

4

5

6

7

8

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

8 7 6

Increasing opportunity costs

x
1

Units of food (millions)

5 4 3 2 1 0 0 1 2

y
1 2

z
1

Units of clothing (millions)

3

4

5

6

7

8

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 the production possibility curve

Food

y

v

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

Master your semester with Scribd & The New York Times

Special offer for students: Only $4.99/month.

Master your semester with Scribd & The New York Times

Cancel anytime.