Introduction: Economic Issues

1
Introduction Economic Issues
2
The Economic Problem

• Economic problems
• production and consumption
• Scarcity the central economic problem
• Macroeconomic ideas
• growth
• unemployment
• inflation
• balance of payments problems
• cyclical fluctuations

3
The Economic Problem

• Microeconomic issues
• choices
• what
• how
• for whom
• the concept of opportunity cost
• rational decision making

4
The Economic Problem

• The production possibility curve
• what the curve shows

5
A production possibility curve
Units of food (millions)
Units of clothing (millions)
6
A production possibility curve
a
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)
7
A production possibility curve
b
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)
8
A production possibility curve
c
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)
9
A production possibility curve
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)
10
A production possibility curve
Units of food (millions)
Units of clothing (millions)
11
A production possibility curve
x
Units of food (millions)
Units of clothing (millions)
12
The Economic Problem

• The production possibility curve
• what the curve shows
• microeconomics and the p.p. curve

13
The Economic Problem

• The production possibility curve
• what the curve shows
• microeconomics and the p.p. curve
• choices and opportunity cost

14
The Economic Problem

• The production possibility curve
• what the curve shows
• microeconomics and the p.p. curve
• choices and opportunity cost
• increasing opportunity cost

15
Increasing opportunity costs
x
y
Units of food (millions)
z
Units of clothing (millions)
16
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

17
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

18
Making a fuller use of resources
Food
O
Clothing
19
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

20
Growth in potential output
Food
O
Clothing
21
Growth in potential output
Food
Now
O
Clothing
22
Growth in potential and actual output
Food
O
Clothing
23
Growth in potential and actual output
Food
O
Clothing
24
The Economic Problem

• The circular flow of income
• firms and households

25
The circular flow of goods and incomes
26
The Economic Problem

• The circular flow of income
• firms and households
• goods markets
• real flows goods and services

27
The circular flow of goods and incomes
28
The circular flow of goods and incomes
Goods and services
29
The Economic Problem

• The circular flow of income
• firms and households
• goods markets
• real flows goods and services
• money flows consumer expenditure

30
The circular flow of goods and incomes
Goods and services
31
The circular flow of goods and incomes
Goods and services
Dh Consumer expenditure
32
The Economic Problem

• The circular flow of income
• firms and households
• goods markets
• real flows goods and services
• money flows consumer expenditure
• factor markets

33
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

34
The circular flow of goods and incomes
Goods and services
Dh Consumer expenditure
35
The circular flow of goods and incomes
Goods and services
Dh Consumer expenditure
Services of factors of production (labour, etc)
36
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

37
The circular flow of goods and incomes
Goods and services
Dh Consumer expenditure
Services of factors of production (labour, etc)
38
The circular flow of goods and incomes
Goods and services
Dh Consumer expenditure
Wages, rent dividends, etc. Dh
Services of factors of production (labour, etc)
39
The Economic Problem

• The circular flow of income (cont.)
• macroeconomic issues
• the size of total flows
• microeconomic issues
• individual markets
• choices within goods and factor markets