AS OCR Economics – The Economic Problem Markets in action

What is Economics about ? CW The Economic Problem Date: Learning objective: Learn about the economic problem and the choices that we have to make as a result STARTER: How can we share out the sweets amongst the class? Which methods could we use? What are the advantages and disadvantages of each? l http://www.economist.com/news/briefing/21601248-generation-old-people-about-change-global-economy-they-will-not-all-do-so

Learning outcomes Be able to describe what economists mean by ‘the economic problem’. Be able to explain the term ‘factors of production’. Be able to explain what is meant by opportunity cost. Be able to explain how production possibility curves can be used to show scarcity, choices, and opportunity cost.

What is Economics about ? Factors of production To make these sweets, what resources would be needed? Make a list. l

Key words The basic economic problem - the basic economic problem is that, because of out finite resources, we have to make choices about which of our infinite wants we satisfy. Opportunity cost – what we give up when we make a choice. Factors of production - the resources of LAND, LABOUR, CAPITAL that are used to produce goods and services.

What is Economics about ? The basic economic problem In 2011-12 the government spent their scarce resources like this? How would you allocate these resources?

What is Economics about ? The basic economic problem How should we allocate the resources devoted to health care? http://www.tutor2u.net/blog/index.php/economics/comments/starter-activity-health-economics/#extended

What is Economics about ? The production possibility frontier (p.p.f.) A p.p.f. which shows the combinations of two or more goods and services that can be produced whilst using all of the available resources efficiently. 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 Units of food (millions) Units of clothing (millions)

A production possibility curve 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 Units of food (millions) Units of clothing (millions)

A production possibility curve Units of food Units of clothing (millions) (millions) 8m 0.0 b 7m 2.2m 6m 4.0m 5m 5.0m 4m 5.6m 3m 6.0m 2m 6.4m 1m 6.7m 0 7.0m Units of food (millions) Units of clothing (millions)

A production possibility curve Units of food Units of clothing (millions) (millions) 8m 0.0 7m 2.2m c 6m 4.0m 5m 5.0m 4m 5.6m 3m 6.0m 2m 6.4m 1m 6.7m 0 7.0m Units of food (millions) Units of clothing (millions)

Increasing opportunity costs x 1 y 1 2 Units of food (millions) z 1 Units of clothing (millions)

Making a fuller use of resources x Production inside the production possibility curve y Food v O Clothing

Growth in potential output Food Now O Clothing

Growth in potential output 5 years’ time Food Now O Clothing

Growth in potential and actual output Food O Clothing

Growth in potential and actual output y x Food O Clothing

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