The Fundamentals of
Economics
• Society’s Technological Possibilities
– Inputs & Outputs
– Factors of Production
– Production Possibility Frontier
1
Syed Arshad Hussain – Jr.
Lecturer
Individual’s Economizing Problem
• Limited Income
• Unlimited Wants
• A Budget Line
• Attainable and Unattainable
Combinations
• Tradeoffs & Opportunity Costs
• Choice
• Income Change
2
Syed Arshad Hussain – Jr.
Lecturer
Individual’s Economizing Problem
$120 Budget 12
DVDs Books
$20 $10
10
6 0 Income = $120
=6
Quantity of DVDs
5 2 8 Pdvd = $20
4 4 6
Unattainable
3 6
Income = $120
2 8 4
Pb = $10
= 12
1 10 2 Attainable
0 12
0
2 4 6 8 10 12 14
Quantity of Books 3
Syed Arshad Hussain – Jr.
Lecturer
Society’s Economizing Problem
• Scarce Resources
• Resource Categories
– Land
– Labor
– Capital
• Investment
– Entrepreneurial Ability
• Factors of Production
4
Syed Arshad Hussain – Jr.
Lecturer
Production Possibilities Model
• Full Employment
• Fixed Resources
• Fixed Technology
• Two Goods
– Consumer Goods (Pizzas)
– Capital Goods (Industrial Robots)
5
Syed Arshad Hussain – Jr.
Lecturer
Production Possibilities Model
Production Possibilities Table
Production Alternatives
Type of Product A B C D E
Pizzas 0 1 2 3 4
(in hundred thousands)
Industrial Robots 10 9 7 4 0
(in thousands)
Plot Points to Create Graph…
6
Syed Arshad Hussain – Jr.
Lecturer
Production Possibilities Model
Production Possibilities Curve
A’
14
13
B’ Unattainable
12
11
A
Industrial Robots 10
9
B C’ Economic
8
C
Growth
7
6
D’
5
D
4
3 Now Attainable
2 Attainable
1 E E’
0 1 2 3 4 5 6 7 8 9
Pizzas
7
Syed Arshad Hussain – Jr.
Lecturer
Production Possibilities Model
Production
A’
Possibilities Curve
14
13
B’ Unattainable
12
11
A
Industrial Robots 10
B C’
9
8
C
7
6
D’
5
D
4
3
2 Attainable
1 E E’
0 1 2 3 4 5 6 7 8 9
Pizzas
8
Syed Arshad Hussain – Jr.
Lecturer
Production Possibilities Model
Production
A’
Possibilities Curve
14
13
B’ Unattainable
12
11
Industrial Robots 10
C’
9
8
7
6 U
D’
5
Under or
4 Unemployment
3
2
1 E’
0 1 2 3 4 5 6 7 8 9
Pizzas
9
Syed Arshad Hussain – Jr.
Lecturer
Unemployment Growth and the
Future
• A Growing Economy
• Economic Growth
– Increasing Resource Supplies
– Increasing Resource Quality
– Technological Advances
10
Syed Arshad Hussain – Jr.
Lecturer
Present Choices & Future
Possibilities
Compare Two Hypothetical Economies
Goods for the Future
Goods for the Future
Future Future
Curve Curve
F
Current P Current
Curve Curve
Goods for the Present Goods for the Present
Presentville Futureville
11
Syed Arshad Hussain – Jr.
Lecturer
Chapter 1
Figure 1-1
The Production Possibilities in a
Graph
12
Syed Arshad Hussain – Jr.
Lecturer
Chapter 1
Figure 1-2
The Production-Possibility
PPF shows how the
Frontier
production of one good is
traded off against the
production of another good.
In the world of scarcity,
choosing one thing means
giving up something else.
The value of the good or
service forgone is its
opportunity cost.
PPF shows how the
production of one good is
traded off against the
production of another good.
When an economy is on its
PPF, it can produce more of
one good only by producing
less of another good.
13
Syed Arshad Hussain – Jr.
Lecturer
Chapter 1
Figure 1-3
Economic Growth Shifts
the PPF Outward
With economic growth, a nation moves from A to B, expanding its food consumption little compared 14
with its increased consumption of luxuries. It can increase its consumption ofSyed
bothArshad
goodsHussain
if it desires.
– Jr.
Lecturer
Chapter 1
Figure 1-4
Economics Must Choose between
Public Goods and Private Goods
(a) A poor frontier society lives from hand to mouth, with little left for public goods like
highways or public health.
(b) Modern urbanized economy is prosperous and chooses to spend more of its higher income 15
on public goods and government services. Syed Arshad Hussain – Jr.
Lecturer
Chapter 1
Figure 1-5
Investment for Future Consumption
Requires Sacrificing Current
Consumption
Countries that invest more heavily forge ahead with this they have higher investment and
consumption in the future.
16
Syed Arshad Hussain – Jr.
Lecturer
The Production-Possibility
Frontier
Sources of Growth and the Dilemma of Poor Countries
Capital Goods and Growth in Poor
and Rich Countries
Rich countries find it easier than
poor countries to devote
resources to the production of
capital, and the more resources
that flow into capital production,
the faster the rate of economic
growth.
Thus, the gap between poor
and rich countries has grown
over time.
17
Syed Arshad Hussain – Jr.
Lecturer
The Fundamentals of
Economics
Read Chapter 2
Markets and Government in a
Modern Economy
18
Syed Arshad Hussain – Jr.
Lecturer