CHAPTER 2 Basic Concepts and Problems of Economics

2.1 The Production Possibilities Frontier

2.1.1 Constant Opportunity Cost
2.1.2 Increasing Opportunity Cost
2.1.3 Economic Concept of PPF
2.1.4 Shift of PPF
2.2 Basic Questions of Economics
2.2.1
What goods will be produced?
2.2.2
How will the goods be produced?
2.2.3
For whom will the goods be produced?
2.3 Economic Systems
2.3.1 Capitalists
2.3.2 Socialists
2.3.3 Mix Economic Systems

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Production Possibilities Frontier

Represents the possible combinations of two
goods that can be produced in a certain period of
time under the conditions of a given state of
technology and fully employed resources.

Constant Opportunity Cost

Increasing Opportunity Cost

PPF: Constant Opportunity Costs

PPF: Increasing Opportunity Costs

Law of Increasing Opportunity Costs

As more of a good is produced, the

opportunity costs of producing that
good increase

Increasing Opportunity Costs

Negative Slope and Opportunity Cost

marginal rate of transformation (MRT) The slope of the production
possibility frontier (ppf).

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Production Possibility Frontier

Framework for Understanding

Productive Efficiency and Inefficiency

Productive Efficiency
The condition where the maximum output is produced
with given resources and technology
Productive Inefficiency
The condition where less than the maximum output is
produced with given resources and technology.
Productive inefficiency implies that more of one good
can be produced without any less of another good
being produced.

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Unemployed vs. Employed Resources

When the economy exhibits productive inefficiency, it is
not producing the maximum output with the available
resources and technology. One reason may be that
the economy is not using all of its resources; that is
some resources are unemployed.

When the economy exhibits productive efficiency it is

producing the maximum output with the available
resources and technology. That is its resources are
fully employed.

Technology
Technology is the body of skills and knowledge involved
in the use of resources in production
An advance in technology commonly refers to the ability
to produce more output with a fixed amount of
resources or the ability to produce the same output with
fewer resources.

The PPF and Various Economic Concepts I

(1)Scarcity is illustrated by the
frontier itself.
(2) Choice is represented by our
having to decide among the
many attainable combinations of
the two goods.
(3) Opportunity cost is most
easily seen as movement from
one point to another
(4) Productive efficiency is
represented by the points on the
PPF (such as AE)
(5) Unemployment - F

Economic Growth within a PPF

Framework
An increase in resources or
an advance in technology
can increase the production
capabilities of an economy,
leading to economic growth
and shift outward in the
production possibilities
frontier.

Economic Growth within a PPF

Framework
If the advance in
technology leads to the
greater production of
only one good (such as
civilian goods in our
exhibit), then the PPF
shifts outward, as shown
in (b).

 FIGURE 2.7 Economic Growth

Shifts the PPF Up and to the Right

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Sources of Growth and the Dilemma of Poor Countries

FIGURE 2.8 Capital Goods and

Growth in Poor and Rich Countries

Rich countries find it easier

than poor countries to devote
resources to the production
of capital, and the more
resources that flow into
capital production, the faster
the rate of economic growth.
Thus, the gap between poor
and rich countries has grown
over time.

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Scarcity, Choice and Opportunity Costs

Scarcity, Choice, and Opportunity Cost

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2.2 Basic Questions of Economics

Every society has some system or process that transforms its scarce resources into
useful goods and services. In doing so, it must decide what gets produced, how it is
produced, and to whom it is distributed.

The primary resources that must be allocated are land, labor, and
capital.
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2.3 Economic Systems

Command Economies (Socialist)
Laissez-Faire Economies: The Free Market (Capitalist)
Mixed Systems, Markets, and Governments

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