Economics: Basic Vocabulary and PPF

• Week 2 will cover basic vocabulary and the PPF (Production Possibilities Frontier).

Review of Last Week

• Covered economy and economics and the role of the economist.
• Discussed positive vs. normative approaches.
• Outlined microeconomics vs. macroeconomics.

Topics for This Week

• The four central questions in economics.
• Schools of thought in economics.
• The PPF as a model to illustrate basic vocabulary.

The Four Central Questions in Economics

• The four central questions in economics are:
• What to produce?
• For whom to produce?
• How to produce?
• How to distribute production?
• Decisions aremade given our resources are limited and needs are unlimited

What to Produce?

• It is essential consider the categories of goods and service, including:
• Consumer Goods, such as automobiles.
• Production Goods (physical capital) like a factory/assembly line.
• Governmental Goods & Services, such as public services.
• Export Goods, such as Aluminum.

For Whom to Produce?

• The important agents to consider for whom to produce are:
• Consumers (households).
• Producers (businesses).
• Government.
• Other countries.

Economic Agent Relationships

• Economic agents consistently exchange resources to meet their needs.

How to Produce?

• How to produce involves understanding Factors of Production including:
• Land (raw materials) such as water, metals, oil.
• Labor (human capital) consists of employees or expertise.
• Production Goods (physical capital) refers to factories or assembly lines.
• Distinguish factors of production from production goods.

How to Distribute Production?

• Production gets distributed through a rationing mechanism.
• Rationing mechanisms include the following
• Price
• Queuing/waitlists.
• Central authority.
• Randomness (e.g., lottery).

Economic Systems

• Each society decides how to answer the four fundamental questions of economics through its economic system.
• Economic systems includes planned, market, and mixed economies:
• In a mixed economy are made by interactions between producers and consumers, and the government.
• Market economies production decisions are made through interactions between producers and consumers
• In planned economies production decisions are made by the government.

Schools of Thought In Economics

• Many economic choices depend on a school of thought, such as which economic system to choose, how to distribute taxes, and what economic interventions the government should prioritize.
• Economic school of thought can be associated with:
• A dominant characteristic.
• A system of economy.
• An economic thinker of mark.

Classical Economics

• Classical economics supports free markets and private property rights.
• Market economy is the associated economic system.
• Minimal government intervention in markets is a dominant characteristics
• Prominent classical economist is Adam Smith (1723-1790)

Marxist Economics

• Marxist school of thought advocates removing private property and collectivizing production factors.
• Planned economy goes hand in hand with Marxist economics
• Controlling markets by the state is a dominant characteristic
• Key intellectual figure associated with this school of thought is Karl Marx (1818-1883).

Keynesian Economics

• Keynesian economics supports government intervention to regulate markets without eliminating them
• Mixed economy as its matching economic system.
• The state regulation markets
• Economic thinker associated with this school of thought is John Maynard Keynes(1883-1946)

The Production Possibilities Frontier (PPF)

• The PPF is a model to illustrate core concepts in basic vocabulary.
• Models simplify reality to illustrate a complex notion.

Model Basis

• Models are made based on assumptions to make reality simpler.
• The Production Possibility Frontier (PPF) has two assumptions:
• It exists in a fictitious economy exclusively producing two resources.
• Production factors for those two goods are not similar.

Production Possibilities

• Tables illustrate an economy's production possibilities over a given period.
• An economy can decide to:
• Produce only gold.
• Produce only trees.
• Produce multiple combinations of both resources.

PPF Graph Illustration

• Points are connected and identified
• Axes should have units of measurements
• Title: PPP of (place's name)

PPF Analysis

• Points inside or along the border correspond to possible (realistic) combinations.
• Border-exterior points represent combinations that are not possible (unrealistic).

Full vs. Under Employment

• Points on the PPF boundary demonstrate efficient combinations.
• Inside points show inefficient combinations.
• It will not be possible to reach the points on the frontier if half of the economy's population is unemployed.

PPF Shifts

• The PPF will shift with any events that affect production prospects in an economy.
• The PPF shifts inward as production prospects decline.
• The PPF shifts outward as production prospects increase.
• Shifts could be imbalanced were solely the production options of a certain products been affected.
• Example is a rain will slow down tree falling.
• Improved equipment enhances trees and gold manufacturing capacity.
• An epidemic cuts the gold labour reserve by a half.

Stable Productions

• If the production capabilities remains consistent while inhabitants change their production selection, the situation changes.
• Beginning at point A (gold production solely).
• Scenario one is inhabitants have the ability to work for half of the day and spend the moment relaxing.
• Scenario 2 is inhabitants change production and generate solely trees

Production Relocation

• If production possibilities stay stable and preferences shift, there is a point shift rather than a curl shift.

Increasing Production

• Increasing the production of one thing will result in a yield increase of said thing but with a loss of the other.

Opportunity Cost

• This yield can be referred by a opportunity cost name
• Moving from one dot to another is 1 unit of the yield and a cost of -3 unit

Characteristics of Opportunity Cost

• Opportunity cost is measured in terms of sacrificed resources.
• If the World of Warcraft economy wants to make more gold, its opportunity cost is the quantity of trees lost.
• At full employment and additional production will necessitate an opportunity cost
• An economy operating at less than full employment can increase output of one good will not sacrifice the other because the resources are underutilized.

Increasing Opportunity Cost

• Cost of Waiver is a growth on the CPP
• It is more expensive to produce an extra tree
• The model's second hypothesis (production capabilities aren't comparable) leads to this result.
• If more of one thing is produce, ineffective production capabilities are utilize
• Law of diminishing returns is how this affect is known

Renunciation Cost

• Trading costs are always there
• Choices include a sacrifice Examples contains:
• Accepting more time on a current employment has an cost of renunciation
• What is renounce if you decide to enter a new relationship
• Accepting a free meal will also come a cost of renounciation

Explore basic economics vocabulary and the Production Possibilities Frontier (PPF). Understand the four central questions in economics: what to produce, for whom to produce, how to produce, and how to distribute production. Learn about different categories of goods and services.