ECON1/5: THE BASIC ECONOMIC QUESTIONS.

This Unit is about the frequently asked questions in Economics and also the PFF curve.

THE BASIC ECONOMIC QUESTIONS.

In an economy, these are the questions that individuals/ firms have to deal with in making decisions. They arise from the fundamental economic questions of scarcity, choice and opportunity. They include:

What to produce or consume and in what quantity given the available resources

How to produce or what techniques of production to use and this mainly depend on labor skills and capital equipment

When to produce or consume

Producers mainly produce more in periods of high and increasing demand but may postpone production when current demand is very low but is expected to be high in the future.

Consumers also decide when to consume, now or in future depending on the rate of time preference.

This is the rate of the desire of individuals whether to consume their incomes now or in the future. Individuals with positive ropt prefer to consume now rather in the future but those with negative ropt prefer to consume in future

Where to produce

This is the question that refers to the location of the production unit/land. Producers usually take decisions on whether locate their enterprise near market or the source of raw materials. Generally firms are located where the cost of production is lowest.

For whom to produce

This is the targeted consumers of goods and services that are produced by a firm. In capitalist economies, production is aimed as satisfying the rich who can pay high taxes and the producers get profits but in command economies, the state directs production for the benefit of all individuals in the country.

VIDEO EXPLAINS MORE ABOUT THE BASIC QUESTIONS.

CONCEPT OF THE PRODUCTION POSSIBILITY FRONTIER (PPF) CURVE/OPPORTUNITY COST CURVE/PRODUCTION TRANSFORMATION CURVE

The PPF curve is a locus of points or a curve which shows alternative combinations of two commodities that can be produced by a country or firm when all existing resources are maximally and efficiently used in a given state of technology.

PPF SCHEDULE

1st possibility Commodity A Commodity B
1 0 25
2 5 20
3 9 16
4 12 13
5 14 10
6 25 0

PPF SCHEDULE OF A AGAINST B

econ 1

A conventional PPF

conventional ppf

A conventional PPF curve should show the relationship between the two commodities produced and is concave in nature.

It shows that in order to produce more of wheat, some wine production has to be foregone and to increase wine production; some wheat production has to be foregone.

This brings in the idea of the marginal rate of transformation which shows how much of one commodity must be given up in order to increase the production of one commodity by an additional unit.

It shows that combinations outside the PPF indicated by ‘’p’’ are not attainable in existing resources and technology.

It also shows that combinations inside the PPF shown by M imply inefficient use of resources.

Only the points on the curve as shown by the PPF curve EDCD indicate efficient use of resources.

 ASSUMPTION ON WHICH THE PPF CONCEPT WAS FORMULATED.

  1. The technologies known are constant
  2. The resources for use are fixed in supply
  3. Only two commodities are produced at ago
  4. Existing resources are mobile and can be transferred from one use to another
  5. There are full employment conditions where all resources are utilized
  6. The economy is closed over no influence from foreign sector

+USES OF THE PPF

  1. It is used to illustrate the fundamental economic problems of scarcity, choice, and opportunity cost. Scarcity is shown by the fact that combinations outside the PPF curve are unattainable as indicated by point p on the conventional PPF curve. Choice is shown by the fact that a certain combination out of the many that lie on the PPF curve is usually chosen and opportunity cost is shown by the fact that in order to produce one unit of a commodity some units have to be foregone in order to produce more of another commodity.
  2. It illustrates economic efficiency in the allocation of resources in that combination along the curve indicate efficient use of resources but those combinations inside the curve like point shows inefficient and underuse of resources
  3. It can be used to show economic growth

THE PPF AND ECONOMIC GROWTH

ppf and economic growth

The out ward bodily shift of the PPF from AB to A, B, indicates economic growth which is the increase.

THE PPF SHIFTS OUTWARDS UNDER THE FOLLOWING CIRCUMSTANCES

  • When there is increase or discovery of new resources
  • When there is improvement in technologies of production
  • When there is increase in the size of labor force
  • When there is increase in skills and labor efficiency
  • When there is increase in capital inflows/ capital accumulation
  • When there is increase in entrepreneurial ability
  • The PPF It can also be used to show economic decline which is illustrated by a bodily inward shift of the PPF curve from AB to A, B.

ppf curve

This situation may occur when there is depletion/ exhaustion in resource

  • When there is decline in technology/technical obsolescence.
  • When there is decline in the skills of labor force
  • When there is decline in the skills of labor force
  • When there is decrease in capital inflows
  • When there is decrease in size of labor force
  • When there is decrease in the number of entrepreneur

THIS VIDEO EXPLAINS MORE ABOUT THE PPF CURVE.

ASSIGNMENT : THE BASIC ECONOMIC QUESTIONS assignment MARKS : 10  DURATION : 24 hours

 

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