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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: Getty Images,


available from Education Image Gallery

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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 its
it reallocates capital
atcan
goods
produce
point
resources A ontwo
it (moving
could the
round
Ym types
PPF
the PPF
produce of
Itfrom
canagoods
A to B) it can
maximum
with
of Ym.its
produce
produce moreresources
consumer
the
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
to and
cost of producing
consumer goods anitextra
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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