Introduction

Chapter 1

Revision:

Economics Trade-off Opp. Cost Scarcity  Microeconomics Macroeconomics Positive Analysis Normative Analysis

Three Basic Economic Questions

As an entrepreneur and as an economic agent, there are three basic economic questions you should ask when deciding how to use scarce resources:

What to produce? How to produce? For whom to produce?

Production-possibility frontier

In economics, a production-possibility frontier (PPF), sometimes called a production-possibility curve or product transformation curve

The PPF shows the maximum amount of one commodity that can be obtained for any specified production level of the other commodity given the society's technology and the amount of factors of production available

Production-possibility frontier

Butter Guns

0 15

1 14

2 12

3 9

4 5

5 0

PPF

0

2

4

68

10

12

14

16

0 2 4 6

Butter

Gun

s

PPF

Efficiency

PPF represent how much of the latter must be sacrificed for a given increase in production

Opportunity cost

Opportunity cost is measured in the number of units of the second good forgone for one or more units of the first good.

Shapes (Increasing opp. Cost )

Constant opp. Cost

Decreasing opp. Cost