Download - Introduction to econ new 2
Production possibilities curve
UNIT 01 PART 02
What is a PPC or PPF??• The production possibility
frontier (PPF) is a curve depicting all maximum output possibilities for two or more goods given a set of inputs (resources, labor, etc.). The PPF assumes that all inputs are used efficiently.
• Compare 2 variables; goods or services• Trade-offs or opportunity cost involved• All available resources are fully employed• All available technology is fully employed• Productive efficiency: Resources are
employed in the least costly way• Technology and production techniques
remains constant within the time of consideration
Abstractions and Assumptions of a PPC
Determinants of PPC• Stock of resources• Productivity of the resources
Opportunity costs v shape of the PPC
• Increasing opportunity costs– Concave to the origin
• Decreasing opportunity costs– Convex to the origin
• Constant opportunity costs– Straight line curve
• Zero opportunity costs– Parallel curve
Increasing opportunity cost per unit of good B
Increasing Opportunity Cost
Q. Fill in the following table and draw the PPC Good X Good Y Opportunity cost of
Y1000 0900 100750 200550 300300 4000 500
Reasons for increasing opportunity costs
• Resources are not homogenous• Techniques of production used to
produce different goods are different• The differences of efficiencies among
industries• A resource that is more appropriate
to produce a particular good is not so appropriate to produce another good
Zero opportunity cost per unit of good B
Q. Give example for situations where opportunity cost becomes zero• Using resources which are
unlimitedly available• When there are no alternative uses
for the resource• When resources are not fully utilized
Constant opportunity cost per unit of good B
Here in this case the sacrificed units equals to the units produced (new)
Decreasing opportunity cost per unit of good B
Impossible; not
supported by
economic theory
Drawing a PPCGood X
Good Y0
Full employmentGood X
Good Y0
BA
C
D
Any point on the curve shows full employment of resources
Full efficiencyGood X
Good Y0
BA
C
D
Any point on the curve shows full efficiency of resources
Full utilization of resourcesGood X
Good Y0
BA
C
D
Any point on the curve shows full utilization of resources
Achievable regionGood X
Good Y0
Any point within the curve/inside the boundary is achievable by the society
Unachievable regionGood X
Good Y0
Any point outside the boundary is unachievable by the society
Scarcity Good X
Good Y0
A Due to scarcity of resources point A can not be achieved
Choice Good X
Good Y0
A B
C
D
E
A society can choose to produce any product combination represented by letters A,B,C,D or E
Alternative options Good X
Good Y0
A B
C
D
E
A society can choose to produce any product combination represented by letters A,B,C,D or E
Unemployment of resourcesGood X
Good Y0
A
Point A shows unemployment of resources. Here in this case resources are either wasted or not used
Under-utilization of resources
Good X
Good Y0
A
Point A shows under utilization of resources. Here in this case resources are either wasted or not used
Idle resourcesGood X
Good Y0
A
Point A shows existence of idling resources. In this case resources are not managed well
Recession Good X
Good Y0
A
B
Recession is a short term downfall of the economy and it can be shown by a point shift from A to B
Depression Good X
Good Y0
A
B
Depression is a long term downfall of the economy and it can be shown by a point shift from A to B
Depression Good X
Good Y0
A
Depression is a long term downfall of the economy and it can be shown by the point A
Depression Good X
Good Y0
Depression is a long term downfall of the economy and it can be shown by a downward shift
Movement of a point without scarification- no
opp. costGood X
Good Y0
A
B
Movement of a point without scarification- no
opp. costGood X
Good Y0
A
B
Movement of a point without scarification- no
opp. costGood X
Good Y0
A
B
Movement of a point without scarification- no
opp. costGood X
Good Y0
A
B
Consumption of a goods bundle lying outside the curve
Cars
Tea 0
A
B
EXPORT
IMPORT
International trade
Cars
Tea 0
A
B
EXPORT
IMPORT
Shifts in PPC• A PPC may shift rightward or leftward
due to– Change in factors of production– Change in factors of productivityEither– Quality wise OR– Quantity wise
Increase in labor productivity
Good X
Good Y0
Addition to labor forceGood X
Good Y0
Redefinition of the working ageGood X
Good Y0
Technological advancements
Good X
Good Y0
Employment training and development
Good X
Good Y0
Increase in educational levelGood X
Good Y0
Use of new management techniques
Good X
Good Y0
Specialization of employeesGood X
Good Y0
Division of labor leading to specialization
Good X
Good Y0
Foreign investments coming into the country
Good X
Good Y0
Promotion of peaceGood X
Good Y0
Increase in labor productivity
Good X
Good Y0
Discovering new lands suitable for cultivation
Good X
Good Y0
Cultivation done in new lands discovered recently
Good X
Good Y0
Discovering new oil wells in Jaffna
Good X
Good Y0
Extraction of oil from wells that were discovered recently in Jaffna
Good X
Good Y0
Giving a fertilizer subsidy to farmersCars
cultivation
0
Biased development in agricultural sector
Cars
cultivation
0
Introduction of new technology to produce cars
Cars
cultivation
0
Net out migration of skilled employees
Good X
Good Y0
Use of outdated technologyGood X
Good Y0
Civil warGood X
Good Y0
Natural disasterGood X
Good Y0
Racial discriminationGood X
Good Y0
Trade protectionismGood X
Good Y0
Imposing trade restrictionsGood X
Good Y0
Economic growthGood X
Good Y0
Economic growth leading to unemployment
Cars
cultivation
0
Economic declineGood X
Good Y0
Increase in GDP of the countryGood X
Good Y0
Present consumption v future production-1
Consumer goods
Investment goods
0
Present consumption v future production-2
Consumer goods
Investment goods
0
Present consumption v future production
Consumer goods
Investment goods
0
Present investment v future production-1
Consumer goods
Investment goods
0
Present investment v future production-2
Consumer goods
Investment goods
0
Present investment v future production-
Consumer goods
Investment goods
0
Economic Systems
What is an economic system????????
• An economic system is the way in which an economy is formed based on their characteristics, features, culture and traditions etc.
Characteristics of an economic system
• Resource ownership by either feudal lord, private sector or public sector
• Existence of a governing body• The target market i.e. either poor,
rich or community• Driving motive i.e. profit or social
welfare
What are the reasons for the existence of variety of economic systems?
• Variety in resource allocation• Difference in ownership of resources• Differences in culture• Difference in governing body i.e.
state or private sector• Difference in traditions
What are the basic types of economic systems?
• Command/planned/socialistic economy
• Market economy• Mixed economy• Transitional economy
Different types of entities that can be seen in an economic system
• Households• Business firms• Government• Labour organizations• Non governmental organizations• Markets
Functions of an economic system
• Determining what commodities are produced and in what quantities.
• Selection of the production technique.
• Taking the distribution decisions.
Criteria that can be used to evaluate an economic
system• Full employment• Economic efficiency• Economic growth• Price stability• External stability• Quality of government• Economic freedom• Fair distribution of income & wealth
Traditional economy• Based on traditions and customs• Was governed by a feudal lord• No formal structure • Barter was the main form of trade• The resources, lands were owned by
the feudal lord
Command/planned/socialistic economy
• State ownership of resources/factors of production except labour
• Less disparity of income• Decisions are taken by a centrally planned
authority• All activities are controlled by the government• Less/no competition• Based on social welfare• No consumer sovereignty
What is consumer sovereignty???
• Consumer sovereignty refers the ability of consumers to influence decisions taken by governing party.
• Consumer sovereignty exist in a market economy where demand curve denotes the choices or preferences of consumers
Reasons for the failure of socialistic economy
• Lack of a planning mechanism• Inefficiencies in the public sector• Political interference• Lack of motivation• Tall structures• Bribery and corruption• High administrative costs
Market economy• Private ownership of resources,
factors of production• Existence of a price mechanism• Consumer sovereignty• Competition between both
consumers and producers• Based on self interests• Entrepreneurs are based on the
motive of profits
Price mechanism• The system in which the basic
economic problems are solved with the use of price can be simply known as price mechanism
• There are three functions of price in a market economy.
• They are– Signaling function-gives information– Incentive function-gives a motive– Rationing function-allocation idea
Functions of profit• Profit encourages innovations• Resource allocation is done
effectively• Profit is a market signal• Higher profits increases the MPS
Invisible hand theory• In a market economy the free market forces
decides the prices and quantities of goods and services to be produced
• The buyers and producers decisions are affected by their self interests– Consumers; maximum utility– Producers; maximum profits
• These producers and consumers decisions are contradicting to each other and they are controlled by the price
• Thus price is called an invisible hand in a market economy.
Mixed economyCommand + market • Features of both market & command
could be seen
Transitional economy• A transition economy or transitional
economy is an economy which is changing from a centrally planned economy to a market economy.
Command economy
Market economy
Examples Transitional Command Market Mixed RussiaChinaUkrainePolandHungaryRomaniaVietnamUzbekistanKazakhstanCzech Rep
CubaNorth KoreaChinaSoviet Union
CanadaUKGermanyNetherlandsUSA
Sri LankaIndiaPakistan