Prelim Eco Notes
TOPIC 1 INTRODUCTION TO ECONOMICS:
The economic problem
The economic problem:
There are unlimited wants and limited resources to meet them, hence individuals must make choices
with what to consume.
4 key economic issues:
All economies attempt to answer the following q's
1. What to produce:
Due to limited resources, economy cannot satisfy all wants within it
o Must decide which wants to satisfy and which to leave unsatisfied
OUTCOME: therefore, it must decide what goods/services are produces
2. How much to produce?
To allocate limited resources efficiently + maximise overall satisfaction of wants:
o OUTCOME: must decide quantity of goods produced
3. How to produce:
Economy must determine how to allocate limited resources in production
o OUTCOME: look for most efficient method of production (so least amount of
resources for max satisfaction)
4. How to distribute production:
Must decide on distribution amongst population
o Prices allocate resources efficiently - but can create inequal outcomes
Economic Decision Market Economy
What to produce? What the individual demands.
How much to The amount consumers are demanding.
produce?
How to produce? Labour (when labour is cheaper)
Capital (when capital (etc. machinery) is
cheaper)
To whom to Distributed using prices
distribute?
Increased demand from consumers = increased
prices
Increase price with scarcity to encourage less
usage (prices allocate resources efficiently)
When is prices are too high, demand goes down.
, (Firms make less)
Changing prices change consumer and producer
behaviour.
Prices allocate resources efficiently
Opportunity cost:
When satisfying want, the opportunity of satisfying an alternative want is forgone. The real cost of
satisfying a want is, therefore, not the money paid, but the next-best alternative want that is
forgone.
Individual consumer has limited resources (aka limited income)
o May have to choose between car and holiday
If they choose car, opportunity cost is holiday she has to forgo
Business/firm:
o Must make choices in allocation of resources
o Firm who produces computer may forgo opportunity to produce electrical
appliances
Govt
o Limited resources to satisfy community wants
Govt may allocate resources to submarines - at the expense of new airport
PPF'S
Production possibility frontier is used to show how opportunity costs arise when
individuals/market makes choices
Opportunity cost is loss in good not getting/gain in good you are getting.
PPF shows different combinations of 2 products that can be produced with given technology
and resources
o All resources used to full capacity
Shows the maximum an economy can produce at any given time.
o Points below the line = unemployment of resources
When society decides to alter the production combination, there is a cost (opportunity cost)
Scenarios on the PPF
Simple production possibility frontier:
Figure 1.1 shows all production scenarios if all resources were used
May choose to produce just oil and no leather (Point A) or just leather and no oil (Point B)
Or may choose any other point on that line.
,New technology on the frontier:
PPF doesn’t always remain the same
Through applying new technology, more efficient methods of production may come about,
increasing the quantity of good produced with the same amount of resources.
Figure 1.3 shows what happens when new technology is implemented for oil production
(max production of oil goes from 160 to 200)
Shown with an outward shift - partially on the PPF
New resources on PPF:
Anything that increase availability of production inputs will change the PPF
o Incl discovery of new resources, expansion of population through immigration
(labour).
Result of new inputs would be ability to produce more of BOTH goods
PPF shifts outwards - entirely
, Unemployment and PPF:
By unemployment, we mean failure to fully use resources (inefficient allocation of resources)
o Example: person looking for work but unable to find it
If resources aren't fully employed, then PPF itself doesn’t change
Our position in relation to the PPF would change
The economy would be producing underneath the PPF
o This means total output is under what it could be.
Shape of the PPF:
So far, PPF's have been straight
Straight line = economy can substitute between production of 2 goods at a constant rate
In the real world, this isn't true -> some resources are better suited for oil production and
other for leather.
o We can't expect to move resources from one good to another without loss of
productive capacity.
TOPIC 1 INTRODUCTION TO ECONOMICS:
The economic problem
The economic problem:
There are unlimited wants and limited resources to meet them, hence individuals must make choices
with what to consume.
4 key economic issues:
All economies attempt to answer the following q's
1. What to produce:
Due to limited resources, economy cannot satisfy all wants within it
o Must decide which wants to satisfy and which to leave unsatisfied
OUTCOME: therefore, it must decide what goods/services are produces
2. How much to produce?
To allocate limited resources efficiently + maximise overall satisfaction of wants:
o OUTCOME: must decide quantity of goods produced
3. How to produce:
Economy must determine how to allocate limited resources in production
o OUTCOME: look for most efficient method of production (so least amount of
resources for max satisfaction)
4. How to distribute production:
Must decide on distribution amongst population
o Prices allocate resources efficiently - but can create inequal outcomes
Economic Decision Market Economy
What to produce? What the individual demands.
How much to The amount consumers are demanding.
produce?
How to produce? Labour (when labour is cheaper)
Capital (when capital (etc. machinery) is
cheaper)
To whom to Distributed using prices
distribute?
Increased demand from consumers = increased
prices
Increase price with scarcity to encourage less
usage (prices allocate resources efficiently)
When is prices are too high, demand goes down.
, (Firms make less)
Changing prices change consumer and producer
behaviour.
Prices allocate resources efficiently
Opportunity cost:
When satisfying want, the opportunity of satisfying an alternative want is forgone. The real cost of
satisfying a want is, therefore, not the money paid, but the next-best alternative want that is
forgone.
Individual consumer has limited resources (aka limited income)
o May have to choose between car and holiday
If they choose car, opportunity cost is holiday she has to forgo
Business/firm:
o Must make choices in allocation of resources
o Firm who produces computer may forgo opportunity to produce electrical
appliances
Govt
o Limited resources to satisfy community wants
Govt may allocate resources to submarines - at the expense of new airport
PPF'S
Production possibility frontier is used to show how opportunity costs arise when
individuals/market makes choices
Opportunity cost is loss in good not getting/gain in good you are getting.
PPF shows different combinations of 2 products that can be produced with given technology
and resources
o All resources used to full capacity
Shows the maximum an economy can produce at any given time.
o Points below the line = unemployment of resources
When society decides to alter the production combination, there is a cost (opportunity cost)
Scenarios on the PPF
Simple production possibility frontier:
Figure 1.1 shows all production scenarios if all resources were used
May choose to produce just oil and no leather (Point A) or just leather and no oil (Point B)
Or may choose any other point on that line.
,New technology on the frontier:
PPF doesn’t always remain the same
Through applying new technology, more efficient methods of production may come about,
increasing the quantity of good produced with the same amount of resources.
Figure 1.3 shows what happens when new technology is implemented for oil production
(max production of oil goes from 160 to 200)
Shown with an outward shift - partially on the PPF
New resources on PPF:
Anything that increase availability of production inputs will change the PPF
o Incl discovery of new resources, expansion of population through immigration
(labour).
Result of new inputs would be ability to produce more of BOTH goods
PPF shifts outwards - entirely
, Unemployment and PPF:
By unemployment, we mean failure to fully use resources (inefficient allocation of resources)
o Example: person looking for work but unable to find it
If resources aren't fully employed, then PPF itself doesn’t change
Our position in relation to the PPF would change
The economy would be producing underneath the PPF
o This means total output is under what it could be.
Shape of the PPF:
So far, PPF's have been straight
Straight line = economy can substitute between production of 2 goods at a constant rate
In the real world, this isn't true -> some resources are better suited for oil production and
other for leather.
o We can't expect to move resources from one good to another without loss of
productive capacity.
