1. Economic systems
The way a society organizes to produce, distribute, and consume goods.
Economic systems try to prevent surpluses (having too much of a good or service)
Economic systems try to avoid shortages (having too little of a good or a service)
The four types of economic systems are: traditional, market, command, and mixed.

2. The Production Possibilities Frontier/Curve (PPF/PPC)
The production possibilities frontier is a graph that shows the combinations of output that an economy can possibly produce given:
The available resources -factors of production. Fully employed and used efficiently
The available production technology.

3. Law of Increasing Opportunity Costs
Resources do not transfer perfectly from the production of one good to another.
Increasing quantities of any good can be obtained only by sacrificing ever-increasing quantities of other goods.
Resources used to produce trucks aren’t ideally suited for producing tanks.

4. Efficiency
Efficiency means getting the maximum output of a good from the resources used in production. Full Employment.
Allocative efficiency- production is such that marginal benefit is equal to marginal cost. Goods and services that are most highly valued.
Every point on a production possibilities frontier curve is efficient.

5. Inefficiency
A production possibilities frontier curve shows potential output, not necessarily actual output.
If we are inefficient- attainable, actual output will be less than the potential output.

6. Inefficiency
Countries may end up inside their production possibilities frontier curve if resources are inefficiently combined.
Such inefficiencies plagued centrally planned economies.

7. Unemployment
Countries may end up inside their production possibilities frontier curve if all available resources are not used.

8. PPF Graph Law of Increasing Opportunity Costs
Step 1: give up one truck 5 B 4
Step 3: give up another truck
Step 2: get two tanks C 3
OUTPUT OF TRUCKS
Step 4: get one more tank D 2 E 1 F 1 2 3 4 5
OUTPUT OF TANKS

9. PPF Graph Unemployment5 B 4 Y C 3
OUTPUT OF TRUCKS
Unemployment 2 1 1 2 3 4 5
OUTPUT OF TANKS

10. Economic Growth A X 5 Currently not attainable B 4 C 3
OUTPUT OF TRUCKS 2 1 1 2 3 4 5
OUTPUT OF TANKS

11. Economic Growth
A point outside the production possibilities frontier curve suggests that we could get more goods than we are capable of producing!
Economic growth is an increase in output (real GDP) – an expansion of production possibilities.

12. Production Possibilities Model
Society uses scarce resources to produce goods and services.
Illustrates production choices
Assumptions:
Full employment- use of all resources
Unemployment – Not using all resources
Fixed resources (# of factors of production-land, labor, capital, is fixed). Change can cause a shift inward. Natural disaster.
Fixed technology
Two goods (hypothetical; economy is producing only two goods, one consumer, one capital. Cell phone - Factory
The production possibilities model shows the maximum combinations of two goods that can be produced with the resources available today.
Full-employment means that we are using all available resources, and they are being used to their potential.
Using two goods is a simplification. You will still see the concepts shown by the PPC without making it any more complicated. Often times, the two goods are general categories of two goods rather than specific goods, so that the PPC shows the tradeoff between choosing those goods.
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13. Externalities
An externality is a cost or benefit accruing to a third party external to the market transaction
Positive externalities
Too little is produced
Demand-side market failures
Negative externalities
Too much is produced
Supply-side market failures
Positive externalities occur when a third person, or persons, is affected by the transaction in a positive way. The good is underproduced when positive externalities are present. The equilibrium output will be smaller than the efficient output because the consumer is willing to pay a price equal to the consumer’s individual marginal benefit, but no more. Since social benefits exist in addition to the private benefit, the government must either aid the producer to encourage more output, or engage in its own production of the item with the external benefits.
Negative externalities occur when a third person, or persons, external to the transaction is affected from the transaction in a negative way. The good is overproduced and the equilibrium output will be greater than the efficient output. This is because the producer, who is not bearing the full cost of production, will be able to produce more at a lower price than the efficient level, which would exist if true costs were reflected in the production decision.
LO4

14. Economic Growth
Economic growth results in an outward shift of the PPF because production possibilities are expanded.

15. Trade-offs: The Production Possibility FrontierX

16. Production Possibilities Model
Production Alternatives
Type of Product A B C D E
Pizzas
(in hundred thousands) 1 2 3 4
Industrial Robots
(in thousands) 10 9 7 4
Plot the Points to Create the Graph…
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17. Production Possibilities Model14 13 12 11 10 9 8 7 6 5 4 3 2 1
The law of
increasing
opportunity costs makes
the PPC concave. A B
Unattainable C
Industrial Robots U D
Attainable E
Pizzas
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18. Test # 2 End of notes

19. A Growing Economy Economic Growth Now Attainable Unattainable14 13 12 11 10 9 8 7 6 5 4 3 2 1 B’
Unattainable A
Economic
Growth B C’ C
Industrial Robots D’ D
Now Attainable
Attainable E E’
Pizzas
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20. Present Choices, Future Possibilities
Compare Two Hypothetical Economies
Future
Curve
Future
Curve F
Goods for the Future
Goods for the Future P
Current
Curve
Current
Curve
Goods for the Present
Goods for the Present
Presentville
Futureville
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21. Set of institutional arrangements in response to economizing problem.
Economic Systems
Set of institutional arrangements in response to economizing problem.
Differences in systems exist by:
Who owns the factors of production?
What method is used to motivate, coordinate, and direct economic activity?
Economic systems are a set of institutional arrangements and a coordinating mechanism to solve economic problems. Economic systems differ in two important ways: Who owns the factors of production and the method used to coordinate economic activity.
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22. Externalities
An externality is a cost or benefit accruing to a third party external to the market transaction
Positive externalities
Too little is produced
Demand-side market failures
Negative externalities
Too much is produced
Supply-side market failures
Positive externalities occur when a third person, or persons, is affected by the transaction in a positive way. The good is underproduced when positive externalities are present. The equilibrium output will be smaller than the efficient output because the consumer is willing to pay a price equal to the consumer’s individual marginal benefit, but no more. Since social benefits exist in addition to the private benefit, the government must either aid the producer to encourage more output, or engage in its own production of the item with the external benefits.
Negative externalities occur when a third person, or persons, external to the transaction is affected from the transaction in a negative way. The good is overproduced and the equilibrium output will be greater than the efficient output. This is because the producer, who is not bearing the full cost of production, will be able to produce more at a lower price than the efficient level, which would exist if true costs were reflected in the production decision.
LO4

23. 1. The Command System Known as socialism or communism
Government ownership of means to production.
Decisions made by a central planning board.
Include production goals, resource usage, consumer vs. capital goods production, etc.
North Korea and Cuba.
Resources are owned by government and economic activity is coordinated by a central planning board. This means that what is produced, how much is produced and the prices that are charged for the output are determined by the central planning board.
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