A wind farm. Copyright: Getty Images, available from Education Image Gallery
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?
Opportunity Cost
Definition – the cost expressed in terms of the next best alternative sacrificed
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
Production Possibility Frontiers
Capital Goods
Consumer Goods
Yo
Xo
A
B
Y1
X1
Assume a country can produce two types of goods with its resources – capital goods and consumer goods
If it devotes all resources to capital goods it could produce a maximum of Ym.
If it devotes all its resources to consumer goods it could produce a maximum of Xm
Ym
Xm
If the country is at point A on the PPF It can produce the combination of Yo capital goods and Xo consumer goods
If it reallocates its resources (moving round the PPF from A to B) it can produce more consumer goods but only at the expense of fewer capital goods. The opportunity cost of producing an extra Xo – X1 consumer goods is Yo – Y1 capital goods.
It can only produce at points outside the PPF if it finds a way of expanding its resources or improves the productivity of those resources it already has. This will push the PPF further outwards.
Positive and Normative Economics
Health care can be improved with more tax funding
Pollution control is effective through a system of fines