PRINCIPLES OF ECONOMICS

Dr. Jalandhar Pradhan

Reference: Karl E. Case, Ray C. Fair and Sharon M. Oster: Principles of Economics, Pearson Publisher
THE PRODUCTION POSSIBILITY FRONTIER

Production Possibility Frontier (PPF) A

graph that shows all the combinations of
goods and services that can be produced if all
of society’s resources are used efficiently.
Production Possibility Curve

Production Possibility Frontier

Negative Slope and Opportunity Cost

marginal rate of
transformation (MRT)
The slope of the production
possibility frontier (ppf).
 The Law of Increasing Opportunity Cost

Production Possibility Schedule for Total

Corn and Wheat Production

TOTAL TOTAL
CORN WHEAT
PRODUCTION PRODUCTION
POINT (MILLIONS OF (MILLIONS OF
ON BUSHELS PER BUSHELS PER
PPF YEAR) YEAR)

A 700 100
B 650 200
C 510 380
D 400 500
E 300 550
ECONOMIC SYSTEMS

COMMAND ECONOMIES

command economy An economy in

which a central government either
directly or indirectly sets output targets,
incomes, and prices.

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ECONOMIC SYSTEMS

LAISSEZ-FAIRE ECONOMIES: THE FREE

MARKET
laissez-faire economy Literally from
the French: “allow [them] to do.” An
economy in which individual people and
firms pursue their own self-interests
without any central direction or
regulation.

market The institution through which

buyers and sellers interact and engage
in exchange.
Some markets are simple and others are complex, but they all involve buyers and sellers
engaging in exchange. The behavior of buyers and sellers in a laissez-faire economy
determines what gets produced, how it is produced, and who gets it. 7 of 34
ECONOMIC SYSTEMS

Consumer Sovereignty

consumer sovereignty The idea that

consumers ultimately dictate what will be
produced (or not produced) by choosing
what to purchase (and what not to
purchase).
ECONOMIC SYSTEMS

Individual Production Decisions: Free

Enterprise

free enterprise The freedom of

individuals to start and operate private
businesses in search of profits.
THE METHOD OF ECONOMICS

positive economics An approach to economics that seeks to

understand behavior and the operation of systems without
making judgments. It describes
•what exists and how it works.

• It strives to describe what exists and how it

works.
• What determines the wage rate for unskilled
workers?
• What would happen if we abolished the
corporate income tax?
The answers to such questions are the subject
of positive economics
normative economics An approach to economics that
analyzes outcomes of economic behavior, evaluates
them as good or bad, and may prescribe courses of
action. Also called policy economics.

Normative economics involves judgments

and prescriptions for courses of action.
• Should the government subsidize or
regulate the cost of higher education?
• Should India allow importers to sell
foreign-produced goods that compete with
India made products?
• Should we reduce or eliminate inheritance
taxes?
• Normative economics is often called policy
economics.
 The Fields of Economics
Behavioral economics
Comparative economic systems
Econometrics
Economic development
Economic history
Environmental economics
Finance
Do aggregate household savings increase when
we automatically enroll people in savings
programs and let them opt out as opposed to
requiring them to sign up?
How does the resource allocation process differ
in market versus command and control systems?
What inferences can we make based on
conditional moment inequalities?
Does increasing employment opportunities for
girls in developing nations increase their
educational achievement?
How did the growth of railroads and
improvement in transportation more generally
change the U.S. banking systems in the
nineteenth century?
What effect would a tax on carbon have on
emissions? Is a tax better or worse than rules?
Is high frequency trading socially beneficial?
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The Fields of Economics
Health economics
The history of economic thought
Industrial organization
International economics
Labor economics
Law and economics
Public economics
Urban and regional economics
Do co-pays by patients change the choice
and use of medicines by insured patients?
How did aristotle think about just prices?
How do we explain price wars in the
airline industry?
What are the benefits and costs of free
trade? Does concern about the
environment change our views of free
trade?
Will increasing the minimum wage
decrease employment opportunities?
Does the current U.S. patent law increase
or decrease the rate of innovation?
Why is corruption more widespread in
some countries than in others?
Do enterprise zones improve employment
opportunities in central cities?
 Any Questions?

© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair