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Economic tools and systems (Production Possibility Frontier (PPF) (Shift…
Economic tools and systems
Choice and comparative advantages
Opportunity cost
Subjective
varies with circumstance [environment]
Sunk cost
We often ignore the sunk cost when we make the decision
Absolute vs. Comparative advantage
Absolute advantage
: produce service and goods with
fewer
resource
Comparative advantage
: has
lower opportunity cost
to produce goods and service [should be specialized in that]
Division of labour
--> increase productivity
Take advantage of individuals preference and ability (comparative advantage )
Develop more experience at a particular task
Reduce the needs(time) to shift between different tasks
Permit the introduction of labour saving machine
Production Possibility Frontier (PPF)
Infeasible
Point lie above the PPF
Efficient
Point relied on PPF
Feasible
Point lies on the PPF or inside the PPF
If the curve is
steeper
, reflect higher opportunity cost of capital goods (x- variable )
Shift
of PPF
Due to
resource, technology and the rule of game change
Change in
resource
availability
Change in the
capital stock
More capital goods (less steeper) make the
entire PPF outward
Change in
technology
Shift the entire PPF outward
Improvement in the
rule of game
shift the entire PPF outward
Greater uncertainty
will shift entire PPF inward
Autarky
Without trade
Consumption= production
Economic system
Pure Command System
The idea is best interest of all member of society
Government decided
Problems
Some resource are wasted
"Plan" are based on the flavor of planners rather than society
Resource are used inefficiently [difficult to get all people's taste ]
Less varieties
Mixed economics
Government acts as consumers and producers and also provide regulation
Pure capitalism
Market alone determine everything [unrestricted market ]
producers and consumers have all freedom
Private ownership of all resource
Problems
Poverty [no social welfare, no social insurance ...]
produce monopolies
No central authority -->no protetction
Externality
No public goods
Unequal bargaining