Introduction:

Economic Issues

The Economic Problem

• Economic problems– production and consumption– scarcity: the central economic problem

• Macroeconomic issues– growth– unemployment– inflation– balance of trade deficits– cyclical fluctuations

The Economic Problem

• 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

The Economic Problem

• The production possibility curve– what the curve shows

0

1

2

3

4

5

6

7

8

0 1 2 3 4 5 6 7 8Units of clothing (millions)

Uni

ts o

f foo

d (m

illio

ns)

Units of food Units of clothing (millions) (millions)

8m 0.0 7m 2.2m 6m 4.0m 5m 5.0m 4m 5.6m 3m 6.0m 2m 6.4m 1m 6.7m 0 7.0m

A production possibility curveA production possibility curve

0

1

2

3

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5

6

7

8

0 1 2 3 4 5 6 7 8Units of clothing (millions)

Uni

ts o

f foo

d (m

illio

ns)

Units of food Units of clothing (millions) (millions)

a 8m 0.0 7m 2.2m 6m 4.0m 5m 5.0m 4m 5.6m 3m 6.0m 2m 6.4m 1m 6.7m 0 7.0m

aA production possibility curveA production possibility curve

0

1

2

3

4

5

6

7

8

0 1 2 3 4 5 6 7 8Units of clothing (millions)

Uni

ts o

f foo

d (m

illio

ns)

Units of food Units of clothing (millions) (millions)

8m 0.0b 7m 2.2m 6m 4.0m 5m 5.0m 4m 5.6m 3m 6.0m 2m 6.4m 1m 6.7m 0 7.0m

b

A production possibility curveA production possibility curve

0

1

2

3

4

5

6

7

8

0 1 2 3 4 5 6 7 8Units of clothing (millions)

Uni

ts o

f foo

d (m

illio

ns)

Units of food Units of clothing (millions) (millions)

8m 0.0 7m 2.2mc 6m 4.0m 5m 5.0m 4m 5.6m 3m 6.0m 2m 6.4m 1m 6.7m 0 7.0m

c

A production possibility curveA production possibility curve

0

1

2

3

4

5

6

7

8

0 1 2 3 4 5 6 7 8Units of clothing (millions)

Uni

ts o

f foo

d (m

illio

ns)

Units of food Units of clothing (millions) (millions)

8m 0.0 7m 2.2m 6m 4.0m 5m 5.0m 4m 5.6m 3m 6.0m 2m 6.4m 1m 6.7m 0 7.0m

A production possibility curveA production possibility curve

0

1

2

3

4

5

6

7

8

0 1 2 3 4 5 6 7 8Units of clothing (millions)

Uni

ts o

f foo

d (m

illio

ns)

A production possibility curveA production possibility curve

0

1

2

3

4

5

6

7

8

0 1 2 3 4 5 6 7 8Units of clothing (millions)

Uni

ts o

f foo

d (m

illio

ns)

x

A production possibility curveA production possibility curve

w

The Economic Problem

• The production possibility curve– what the curve shows

– microeconomics and the p.p. curve:

The Economic Problem

• The production possibility curve– what the curve shows

– microeconomics and the p.p. curve:• choices and opportunity cost

The Economic Problem

• The production possibility curve– what the curve shows

– microeconomics and the p.p. curve:• choices and opportunity cost

• increasing opportunity cost

Units of clothing (millions)

Uni

ts o

f foo

d (m

illio

ns)

Increasing opportunity costsIncreasing opportunity costs

x

y1

1

z1

2

0

1

2

3

4

5

6

7

8

0 1 2 3 4 5 6 7 8

The Economic Problem

• The production possibility curve– what the curve shows

– microeconomics and the p.p. curve:• choices and opportunity cost

• increasing opportunity cost

– macroeconomics and the p.p. curve:

The Economic Problem

• The production possibility curve– what the curve shows

– microeconomics and the p.p. curve:• choices and opportunity cost

• increasing opportunity cost

– macroeconomics and the p.p. curve:• production within the curve

v

x

y

O

Making a fuller use of resourcesMaking a fuller use of resourcesFo

od

Clothing

Production insidethe production

possibility curve

The Economic Problem

• The production possibility curve– what the curve shows

– microeconomics and the p.p. curve:• choices and opportunity cost

• increasing opportunity cost

– macroeconomics and the p.p. curve:• production within the curve

• shifts in the curve

O

Growth in potential outputGrowth in potential outputFo

od

Clothing

Now

O

Food

Clothing

Now

Growth in potential outputGrowth in potential output

5 years’ time

O

Food

Clothing

Growth in potential and actual outputGrowth in potential and actual output

O

Food

Clothing

Growth in potential and actual outputGrowth in potential and actual output

xy

The Economic Problem

• The circular flow of income

– firms and households

The circular flow of goods and incomesThe circular flow of goods and incomes

The Economic Problem

• The circular flow of income

– firms and households

– goods markets

• real flows: goods and services

The circular flow of goods and incomesThe circular flow of goods and incomes

Goods and services

The circular flow of goods and incomesThe circular flow of goods and incomes

The Economic Problem

• The circular flow of income

– firms and households

– goods markets

• real flows: goods and services

• money flows: consumer expenditure

Goods and services

The circular flow of goods and incomesThe circular flow of goods and incomes

Goods and services

£Consumer

expenditure

The circular flow of goods and incomesThe circular flow of goods and incomes

The Economic Problem

• The circular flow of income

– firms and households

– goods markets

• real flows: goods and services

• money flows: consumer expenditure

– factor markets

The Economic Problem

• The circular flow of income

– firms and households

– goods markets

• real flows: goods and services

• money flows: consumer expenditure

– factor markets

• real flows: services of labour and other factors

Goods and services

£Consumer

expenditure

The circular flow of goods and incomesThe circular flow of goods and incomes

Goods and services

£Consumer

expenditure

Services of factors of production (labour, etc)

The circular flow of goods and incomesThe circular flow of goods and incomes

The Economic Problem

• The circular flow of income

– firms and households

– goods markets

• real flows: goods and services

• money flows: consumer expenditure

– factor markets

• real flows: services of labour and other factors

• money flows: wages and other incomes

Goods and services

£Consumer

expenditure

Services of factors of production (labour, etc)

The circular flow of goods and incomesThe circular flow of goods and incomes

Goods and services

£Consumer

expenditure

Wages, rentdividends, etc.

£

Services of factors of production (labour, etc)

The circular flow of goods and incomesThe circular flow of goods and incomes

The Economic Problem

• The circular flow of income (cont.)

– macroeconomic issues

• the size of total flows

– microeconomic issues

• individual markets

• choices within goods and factor markets