Economic problems
- 1. The Economic Problem: Scarcity and Choice
- 2. Scarcity, Choice, and Opportunity Cost • Human wants are unlimited, but resources are not. • Three basic questions must be answered in order to understand an economic system: – What gets produced? – How is it produced? – Who gets what is produced?
- 3. Scarcity, Choice, and Opportunity Cost
- 4. Scarcity, Choice, and Opportunity Cost • Capital refers to the things that are themselves produced and then used to produce other goods and services. • The basic resources that are available to a society are factors of production: – Land – Labor – Capital
- 5. Scarcity, Choice, and Opportunity Cost • Production is the process that transforms scarce resources into useful goods and services. • Resources or factors of production are the inputs into the process of production; goods and services of value to households are the outputs of the process of production.
- 6. Capital Goods and Consumer Goods • Capital goods are goods used to produce other goods and services. • Consumer goods are goods produced for present consumption.
- 7. Capital Goods and Consumer Goods • Investment is the process of using resources to produce new capital. Capital is the accumulation of previous investment. • The opportunity cost of every investment in capital is forgone present consumption.
- 8. The Production Possibility Frontier •The production possibility frontier (ppf) is a graph that shows all of the combinations of goods and services that can be produced if all of society’s resources are used efficiently.
- 9. The Production Possibility Frontier – The production possibility frontier curve has a negative slope, which indicates a trade-off between producing one good or another.
- 10. The Production Possibility Frontier • Points inside of the curve are inefficient. • At point H, resources are either unemployed, or are used inefficiently.
- 11. The Production Possibility Frontier • Point F is desirable because it yields more of both goods, but it is not attainable given the amount of resources available in the economy.
- 12. The Production Possibility Frontier • Point C is one of the possible combinations of goods produced when resources are fully and efficiently employed.
- 13. The Production Possibility Frontier • A move along the curve illustrates the concept of opportunity cost. • From point D, an increase the production of capital goods requires a decrease in the amount of consumer goods.
- 14. Economic Growth • Economic growth is an increase in the total output of the economy. It occurs when a society acquires new resources, or when it learns to produce more using existing resources. • The main sources of economic growth are capital accumulation and technological advances.
- 15. Economic Growth • Outward shifts of the curve represent economic growth. • An outward shift means that it is possible to increase the production of one good without decreasing the production of the other.
- 16. Economic Growth • From point D, the economy can choose any combination of output between F and G.
- 17. Capital Goods and Growth in Poor and Rich Countries • Rich countries devote more resources to capital production than poor countries. • As more resources flow into capital production, the rate of economic growth in rich countries increases, and so does the gap between rich and poor countries.
- 18. Economic Systems • The economic problem: Given scarce resources, how, exactly, do large, complex societies go about answering the three basic economic questions?
- 19. Economic Systems • Economic systems are the basic arrangements made by societies to solve the economic problem. They include: – Command economies – Laissez-faire economies – Mixed systems
- 20. Economic Systems • In a command economy, a central government either directly or indirectly sets output targets, incomes, and prices. • In a laissez-faire economy, individuals and firms pursue their own self-interests without any central direction or regulation.
- 21. Economic Systems • The central institution of a laissez-faire economy is the free-market system. • A market is the institution through which buyers and sellers interact and engage in exchange.
- 22. Economic Systems • Consumer sovereignty is the idea that consumers ultimately dictate what will be produced (or not produced) by choosing what to purchase (and what not to purchase).
- 23. Economic Systems • Free enterprise: under a free market system, individual producers must figure out how to plan, organize, and coordinate the production of products and services.
- 24. Economic Systems • In a laissez-faire economy, the distribution of output is also determined in a decentralized way. The amount that any one household gets depends on its income and wealth.
- 25. Economic Systems • The basic coordinating mechanism in a free market system is price. Price is the amount that a product sells for per unit. It reflects what society is willing to pay.
- 26. Mixed Systems, Markets, and Governments •Since markets are not perfect, governments intervene and often play a major role in the economy. Some of the goals of government are to: • Minimize market inefficiencies • Provide public goods • Redistribute income • Stabilize the macroeconomy: – Promote low levels of unemployment – Promote low levels of inflation