The Economic Problem

• Economic Issues

The Economic Problem

• Economic problems
• production and consumption
• Scarcity: the central economic problem
• defining scarcity
• use of resources (factors of production)
• labour
• land and raw materials
• capital
• demand and supply
• importance of reconciling demand and supply
• actual and potential demand and supply

Dividing up the Subject

• Macroeconomic issues
• growth
• unemployment
• inflation
• balance of payments problems
• cyclical fluctuations

Dividing up the Subject

• Macroeconomic issues (cont.)
• historical perspective
• debates
• transmission mechanisms
• different schools of thought

Dividing up the Subject

• 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

Q Which one of the following is a microeconomic issue?

• The government spends more than it receives in tax revenue.
• House prices rise more rapidly.
• Unemployment rises.
• The Bank of England raises interest rates.
• Imports exceed exports.

Modelling Economic Relationships

• Modelling economic relationships
• the importance of assumptions
• simplification: ceteris paribus assumption
• The production possibility curve
• what the curve shows

• Units of clothing (millions)

• Units of food (millions)

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

• A production possibility curve

• Units of clothing (millions)

• Units of food (millions)

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

• a

• A production possibility curve

• Units of clothing (millions)

• Units of food (millions)

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

• b

• A production possibility curve

• Units of clothing (millions)

• Units of food (millions)

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

• c

• A production possibility curve

• Units of clothing (millions)

• Units of food (millions)

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

• A production possibility curve

• Units of clothing (millions)

• Units of food (millions)

• A production possibility curve

• Units of clothing (millions)

• Units of food (millions)

• x

• A production possibility curve

• w

Modelling Economic Relationships

• The production possibility (PP) curve
• what the curve shows

• microeconomics and the PP curve:
• choices and opportunity cost
• increasing opportunity cost

• Units of clothing (millions)

• Units of food (millions)

• Increasing opportunity costs

• x

• y

• 1

• 1

• z

• 1

• 2

Q Assume that a firm can produce 6 units of good X or 12 units of good Y per hour with its current resources. The opportunity cost of a unit of X is:

• 72 units of Y
• 12 units of Y
• 6 units of Y
• 2 units of Y
• ½ unit of Y

Modelling Economic Relationships

• The production possibility (PP) curve
• what the curve shows
• microeconomics and the PP curve:
• choices and opportunity cost
• increasing opportunity cost

• macroeconomics and the PP curve:
• production within the curve

• v

• x

• y

• O

• Making a fuller use of resources

• Food

• Clothing

• Production inside
• the production
• possibility curve