The Economic Problem

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
• shifts in the curve

• O

• Growth in full-capacity output

• Food

• Clothing

• Now

• O

• Food

• Clothing

• Now

• Growth in full-capacity output

• 5 years’ time

• O

• Food

• Clothing

• Growth in full-capacity and actual output

• Growth in full-capacity output shown by outward shift in in PP curve

• O

• Food

• Clothing

• Growth in full-capacity and actual output

• x

• y

• Growth in actual output shown by movement from x to y

Q Which of the following would shift the PP curve outwards?

• An increase in the population of working age
• A reduction in unemployment
• A reduction in VAT
• An increase in the general level of prices
• A reduction in expenditure on education

Modelling Economic Relationships

• The circular flow of income
• firms and households

The circular flow of goods and incomes

Modelling Economic Relationships

• The circular flow of income
• firms and households
• goods markets
• real flows: goods and services

The circular flow of goods and incomes