1. The economic problem: scarcity and choice Three basic questions in economics: Resources Producers Households Natural resources Labor Capital Allocation of resources Distribution of output How is it produced?

2. Scarcity, choice and opportunity cost One person economy (Bill): What he wants work food wood (place to live) leisure He has 24 hours per day Opportunity cost: The best alternative that he gives up, when he makes a choice. vs.

3. More than one person economy (Bill and Mark): New dimension of opportunity cost problem: How Bill and Mark split the work? A producer has a comparative advantage over another in the production of a good if it can produce that product a lower opportunity cost Example: Maximum daily production Autarky production Specialization production Trade after specialization woodfood Mark20 Bill612 woodfood Mark10 Bill44 woodfood Mark164 Bill012 Given that Mark and Bill value wood and food equally Total prod. 14 14 Total prod. 16 16 woodfood Mark11 Bill55

4. The production possibility frontier (PPF) PPF: A graph that shows all the combinations of goods that can be produced if all of society’s resources are used efficiently. Example: there are only 2 goods in the economy (wheat and teaching services) wheat teaching services PPF Discussion: - Point A - Point C - Point B - Negative slope of PPF (opportunity cost) - Marginal rate of transformation (MRT): slope of PPF - Increasing MRT (increasing opportunity cost) A B C

5. The production possibility frontier (PPF) Economic growth and the PPF Question: How would the previous PPF graph be affected under each improvement: 1) Better fertilizers 2) Better projectors 3) Better labor training systems. In particular teachers can learn faster how to perform the duties of a farmer and vice-versa. Gains from specialization and the PPF