1. THE ECONOMIC PROBLEM
SCARCITY

2. SCARCITY We have an unlimited want (or need) for goods and services.
The resources used to make the goods and services (natural, human and capital resources) are limited.

3. ECONOMIC GOODS Are scarce There are more wanted than available
They usually have a price as a method of allocation
They may be allocated in ways other than price

4. FREE GOODS Are not scarce There are enough available to meet our wants
They have no price - are free.

5. THREE ECONOMIC QUESTIONS
Because of scarcity any society has to find answers to the three economic questions
What is produced ? (guns or roses ?)
How is it produced ? (capital / labour ratio)
For Who ? (who gets the products)

6. CONSUMER SOVEREIGNTY
In a market society the answer to the question “What is produced” is generally decided by consumers. What consumers decide to buy (with their “dollar votes”) is generally produced.

7. Production Possibility Curves
Are a useful economic model which can be used to show, explain, predict, measure, analyse, demonstrate many economic ideas like
Scarcity
Relative Cost/ Trade-Off
Unemployment / Underemployment
Economic Growth

8. SCARCITY
Cannot attain here
In the short run
The line or frontier shows the maximum attainable combinations between two products. Points outside the curve are unattainable given our present resources and technology. A B

9. Relative Cost
When we produce more of product B we must sacrifice some of product A. The amount we sacrifice is the relative cost (or opportunity cost if it is the next best alternative) A B

10. UNEMPLOYMENT
If the production levels are at Z it means there is unused or underused capacity. It means there is unemployment (resources not being used) or underemployment (resources not being used efficiently) A Z B
At Z, production of more B is possible without loss of A.

11. Economic Growth
Economic growth occurs when either there is an increase in production or an increase in productive capacity (or both). It is the result of more resources or better use of existing resources. A B

12. Economic Growth
If a country increases the production of capital goods (that is investment), then the productive capacity of the country is likely to increase.
A country at Y with a high proportion of capital good production is likely to experience more economic growth than a country at X.
Capital
goods Y X
Consumer goods

13. CONSTANT COSTS
If the frontier is a straight line then the relative costs will be constant at all levels of production. In the example here, an increase in one B will always result in a loss of fiveA. A 15 5 B

14. INCREASING COSTS
With a concave frontier the relative cost is not constant but increases as the level of production increases. That is, as we produce more and more of a product, it becomes relatively more and more costly. A B

15. INCREASING COSTS
One reason for increasing relative costs is that not all resources are equally suited to produce both products. Some resources are specialised for one type of production only.

16. ALLOCATIVE EFFICIENCY
Refers to the ONE point on the PPC which best meets consumers wants and needs. This ONE point will generally be reached with free efficient markets and consumer sovereignty. A B

17. QUESTIONS ?

18. What to produce ? Roses or Tulips???
How is the decision reached as to the quantities produced of roses and tulips???? ?
tulips
roses

19. What to produce ?
How is it decided whether to increase police protection or increase state education ?

20. How to produce ?
How is it decided whether to use capital intensive methods or labour intensive methods ?

21. Who - gets the products ? Who gets to use:
The privately produced goods and services ?
The free parking spaces available ?
The hospital beds in State hospitals ?
Police protection ?

22. Allocation of products
You are a dictator of a small island nation - of 100 households. There are no TV’s. You have been given 20 TV’s - each with its own satellite dish. Decide on how you will allocate the TV’s. State advantages and disadvantages of your method.

23. Vocabulary resources opportunity cost increasing costs scarcity
Inputs into the production process.
The best alternative forgone.
More and more of one good has to be given up in order to produce additional units of another good.
There is more wanted than there is available
resources
opportunity cost
increasing costs
scarcity

24. Vocabulary production consumption model ceteris paribus
Using resources to make goods or services.
Using up goods or services to satisfy needs and wants.
A simplified view of reality.
All other factors remaining the same
production
consumption
model
ceteris paribus