Introduction: Economic Issues 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 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 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 The production possibility curve –what the curve shows

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

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

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

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

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

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

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

The Economic Problem The production possibility curve –what the curve shows –microeconomics and the p.p. curve: 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 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 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) Units of food (millions) Increasing opportunity costs x y 1 1 z 1 2

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 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 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 resources Food Clothing Production inside the 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 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 output Food Clothing Now

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

O Food Clothing Growth in potential and actual output

O Food Clothing Growth in potential and actual output x y

The Economic Problem The circular flow of income –firms and households The circular flow of income –firms and households

The 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 income –firms and households –goods markets real flows: goods and services

The circular flow of goods and incomes

Goods and services

The Economic Problem The circular flow of income –firms and households –goods markets real flows: goods and services money flows: consumer expenditure The circular flow of income –firms and households –goods markets real flows: goods and services money flows: consumer expenditure

The circular flow of goods and incomes Goods and services

£ Consumer expenditure The 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 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 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 incomes

Goods and services £ Consumer expenditure Services of factors of production (labour, etc) The 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 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