The document discusses key economic concepts related to scarcity, production, and systems. It addresses that human wants are unlimited but resources are scarce, so economies must answer basic questions about what, how, and for whom to produce. Production requires inputs of land, labor, and capital to transform into goods and services. The production possibility frontier model illustrates the tradeoffs between different goods that can be produced based on available resources. Economic systems differ in how they coordinate production and allocation of goods through mechanisms like markets, prices, and central planning.

1. The Economic Problem:
Scarcity and Choice

2. Scarcity, Choice, and Opportunity Cost
• Human wants are unlimited, but resources
are not.
• Three basic questions must be answered in
order to understand an economic system:
– What to produce?
– How to produce?
– For whom to produce?

3. Scarcity, Choice, and Opportunity Cost
• Capital refers to the things that are
themselves produced and then used to
produce other goods and services.
• The basic resources that are available to a
society are factors of production:
–Land
–Labor
– Capital

4. Scarcity, Choice, and Opportunity Cost
• Production is the process that transforms
scarce resources into useful goods and
services.
• Resources or factors of production are the
inputs into the process of production; goods
and services of value to households are the
outputs of the process of production.

5. Capital Goods and Consumer Goods
• Capital goods are goods used to produce
other goods and services.
• Consumer goods are goods produced for
present consumption.

6. The Production Possibility Frontier
•The production possibility
frontier (ppf) is a graph that
shows all of the combinations of
goods and services that can be
produced if all of society’s
resources are used efficiently.

7. The Production Possibility Frontier
– The production
possibility frontier
curve has a negative
slope, which indicates
a trade-off between
producing one good or
another.

8. The Production Possibility Frontier
• Points inside of the
curve are inefficient.
• At point H, resources
are either unemployed,
or are used inefficiently.

9. The Production Possibility Frontier
• Point F is desirable
because it yields more
of both goods, but it is
not attainable given
the amount of
resources available in
the economy.

10. The Production Possibility Frontier
• Point C is one of the
possible combinations
of goods produced
when resources are
fully and efficiently
employed.

11. The Production Possibility Frontier
• A move along the
curve illustrates the
concept of opportunity
cost.
• From point D, an
increase the production
of capital goods
requires a decrease in
the amount of
consumer goods.

12. Economic Growth
• Economic growth is an increase in the total
output of the economy. It occurs when a
society acquires new resources, or when it
learns to produce more using existing
resources.
• The main sources of economic growth are
capital accumulation and technological
advances.

13. Economic Growth
• Outward shifts of the
curve represent
economic growth.
• An outward shift means
that it is possible to
increase the production
of one good without
decreasing the
production of the other.

14. Economic Growth
• From point D, the
economy can choose
any combination of
output between F and
G.

15. Economic Systems
• The economic problem: Given scarce
resources, how, exactly, do large, complex
societies go about answering the three basic
economic questions?

16. Economic Systems
• Economic systems are the basic
arrangements made by societies to solve the
economic problem. They include:
– Command economies (Socialist Economies)
– Laissez-faire economies
– Mixed systems

17. Economic Systems
• In a command economy, a central
government either directly or indirectly sets
output targets, incomes, and prices.
• In a laissez-faire economy, individuals and
firms pursue their own self-interests without
any central direction or regulation.

18. Economic Systems
• The central institution of a laissez-faire
economy is the free-market system.
• A market is the institution through which
buyers and sellers interact and engage in
exchange.

19. Economic Systems
• Consumer sovereignty is the idea that
consumers ultimately dictate what will be
produced (or not produced) by choosing
what to purchase (and what not to
purchase).

20. Economic Systems
• The basic coordinating mechanism in a free
market system is price. Price is the amount
that a product sells for per unit. It reflects
what society is willing to pay.

21. Mixed Systems,
Markets, and Governments
•Since markets are not perfect, governments
intervene and often play a major role in the
economy. Some of the goals of government are to:
• Minimize market inefficiencies
• Provide public goods
• Redistribute income
• Stabilize the macroeconomy:
– Promote low levels of unemployment
– Promote low levels of inflation

22. Rationality
The theory of rationality rests on the following conception of
human behavior:
• There exists a set of conceivable actions which every
individual may undertake and which lead to certain
consequences. Individuals possess a mental order of
preferences concerning all the possible consequences of their
actions. They evaluate these consequences, and , given the
constraints, decide upon a particular action.
• They therefore make their choice coherently with their
preferences and with the constraints upon them. The choice is
therefore the outcome of a rational computing activity, and it
matters how complex the calculations required for rationality
is.
• Every decision will lead to maximization of utility.

23. Marginalism…
• Marginal means additional…
• To get the most out of our resources, we
should only take an action when the
marginal benefits are greater than the
marginal costs. MU, MR and MC.

24. Marginal Decision Examples…
• How clean is our house?
• Do we clean to 100%
cleanliness?
• How about when company is
coming?
• You clean to the point where
the marginal costs outweigh
the expected marginal
benefits!

25. Opportunity cost
It is the process of choosing one good or service
over another. The item that you don’t pick is the
opportunity cost.

26. Partial(Closed Economy) and General Equilibrium(Open
Economy)
In partial equilibrium analysis, the determination of the price of a good is
simplified by just looking at the price of one good, and assuming that the prices of
all other goods remain constant. The Marshallian theory of demand and supply is
an example of partial equilibrium analysis.
Partial Equilibrium Analysis — The impact of a change in supply or demand in
one market only—the market directly impacted.
The general equilibrium refers to the equilibrium in which production,
consumption, prices, and international trade are determined simultaneously for all
goods produced and consumed in the economy. General Equilibrium Analysis
— The impact of a price change in one market on the equilibrium prices and
quantities in all other markets.
Spillover Effect — A change in one market’s equilibrium as a result of a change
in another market’s equilibrium. (All the economic and financial crisis, OPEC
effect, imposing of high tariff, currency of China and its impact on US)