JMJ Marist Brothers

COLLEGE OF BUSINESS ADMINISTRATION

Notre Dame of Marbel University
City of Koronadal

A MODULE IN BAC 101 (BASIC MICROECONOMICS)

MODULE 1, WEEK 1 to 2
FUNDAMENTAL CONCEPTS IN ECONOMICS

LEARNING OUTCOMES
At the end of the module, the students will be able to:

1. Explain the importance of Economizing.

2. Relate Economics into your daily life.
3. Proposed a solution on how to manage scarce resources.
4. Understand the concept of opportunity cost.
5. Analyze the answer to the basic economic problems.
6. Recognize the economic system of a particular country.
7. Practice the economic way of reasoning.

INTRODUCTION
Economics is one of the oldest and most influential of intellectual disciplines. Practically
all of the great thinkers, from Aristotle to Einstein, have tried their hand at it, and the great
economists like Adam Smith, Thomas Malthus, David Ricardo, John Maynard Keynes and Milton
Friedman rank among the most influential minds in our history. The economic paradigm permeates
our thinking about practically every area of human activity. Military analysts talk in terms of
“assets” and “tradeoffs” while theologians quote economic statistics. Adam Smith’s ideas about
competition had a strong influence on Charles Darwin’s study of biology. Insect colonies are said
to “invest” in nest building. Our thinking about politics and social behavior draws heavily on ideas
about incentives, trading, and maximization that come from economics. The word economics
comes from ancient Greece (like so many words and important ideas) when an “economist” was
the manager of an estate. Those very practical economists grappled with all the basic problems of
economic decision-making facing a modern executive today. What is the optimal mix of crops?
How much to invest in new equipment? or irrigation instead? Should we sell our grain now, or
wait until prices improve? Modern economics returns the compliment by providing the
foundations of business administration today. Successful executives have often told the author that
the principles they draw on every day in making decisions are those that they learned in their first
courses in economics. Good reason to “invest” in learning the foundations of economic analysis!

Every society must provide goods and services for the welfare of its citizens. The economy
consists of all of the activities involved in the production and distribution of these goods and
services. Economics, as the study of the economy, seeks to address three basic questions: a) Are
there fundamental principles that help us understand how the economy works? b) How well does
the economy perform in achieving objectives? c) How would changes in laws or political
institutions affect the performance of the economy?

Economists have investigated the nature of family life, the arts, education, crime, sports,
job creation, the list is virtually endless because so much of our lives involve making choices. How
do individuals make choices: Would you like better grades? More time to relax? More time
watching movies? Getting better grades probably requires more time studying, and perhaps less
relaxation and entertainment. Not only must we make choices as individuals, we must make
choices as a society. Do we want a cleaner environment? Faster economic growth? Both may be
desirable, but efforts to clean up the environment may conflict with faster economic growth.
Society must make choices. Economics is defined less by the subjects economists investigate than
by the way in which economists investigate them. Economists have a way of looking at the world
that differs from the way scholars in other disciplines look at the world. It is the economic way of
thinking; this chapter introduces that way of thinking.

ACTIVITY
1. List three questions that needs economic decision
2. Activity on managing scarcity
3. Identify the economic resources that are abundant in your locality.

ACQUISITION OF NEW KNOWLEDGE

Contents:

1. The Need to Economize

2. Opportunity cost
3. The Basic Economic Decisions
4. The Economic Ways of Reasoning: Economic Theory and Its Models; Ceteris Paribus
Assumption; Rational Assumptions

A. THE NEED TO ECONOMIZE

Economics is the study of how humans make decisions in the face of scarcity. These can
be individual decisions, family decisions, business decisions or societal decisions. If you look
around carefully, you will see that scarcity is a fact of life. Scarcity means that human wants for
goods, services and resources exceed what is available. Resources, such as labor, tools, land, and
raw materials are necessary to produce the goods and services we want but they exist in limited
supply. Of course, the ultimate scarce resource is time- everyone, rich or poor, has just 24 hours
in the day to try to acquire the goods they want. At any point in time, there is only a finite amount
of resources available.

In 2015 the labor force in the United States contained over 158.6 million workers,
according to the U.S. Bureau of Labor Statistics. Similarly, the total area of the United States is
3,794,101 square miles. These are large numbers for such crucial resources, however, they are
limited. Because these resources are limited, so are the numbers of goods and services we produce
with them. Combine this with the fact that human wants seem to be virtually infinite, and you can
see why scarcity is a problem.

If you still do not believe that scarcity is a problem, consider the following: Does everyone
need food to eat? Does everyone need a decent place to live? Does everyone have access to
healthcare? In every country in the world, there are people who are hungry, homeless and in need
of healthcare, just to focus on a few critical goods and services. Why is this the case? It is because
of scarcity.

The Problem of Scarcity

Think about all the things you consume: food, shelter, clothing, transportation, healthcare,
and entertainment. How do you acquire those items? You do not produce them yourself. You buy
them. How do you afford the things you buy? You work for pay. Or if you do not, someone else
does on your behalf. Yet most of us never have enough to buy all the things we want. This is
because of scarcity. So how do we solve it?

Every society, at every level, must make choices about how to use its resources. Families
must decide whether to spend their money on a new car or a fancy vacation. Towns must choose
whether to put more of the budget into police and fire protection or into the school system. Nations
must decide whether to devote more funds to national defense or to protecting the environment. In
most cases, there just isn’t enough money in the budget to do everything. So why do we not each
just produce all of the things we consume? The simple answer is most of us do not know how but
that is not the main reason. (When you study economics, you will discover that the obvious choice
is not always the right answer or at least the complete answer. Studying economics teaches you to
think in a different of way.) Think back to 3 decades ago when individuals knew how to do so
much more than we do today, from building their homes, to growing their crops, to hunting for
food, to repairing their equipment. Most of us do not know how to do all or any of those things. It
is not because we could not learn. Rather, we do not have to. The reason why is something
called the division and specialization of labor, a production innovation first put forth by Adam
Smith, in his book, The Wealth of Nations.

The Division of And Specialization of Labor

The formal study of economics began when Adam Smith (1723–1790) published his
famous book The Wealth of Nations in 1776. Many authors had written on economics in the
centuries before Smith but he was the first to address the subject in a comprehensive way. In the
first chapter, Smith introduces the division of labor which means that the way a good or service
is produced is divided into a number of tasks that are performed by different workers, instead of
all the tasks being done by the same person.

Modern businesses divide tasks. Even a relatively simple business like a restaurant divides
up the task of serving meals into a range of jobs like top chef, sous chefs, less-skilled kitchen help,
servers to wait on the tables, a greeter at the door, janitors to clean up, and a business manager to
handle paychecks and bills not to mention the economic connections a restaurant has with suppliers
of food, furniture, kitchen equipment, and the building where it is located. A complex business
like a large manufacturing factory, such as the shoe factory or a hospital can have hundreds of job
classifications.

Why the Division of Labor Increases Production

When the tasks involved with producing a good or service are divided and subdivided,
workers and businesses can produce a greater quantity of output. Smith offered three reasons.

First, specialization in a particular small job allows workers to focus on the parts of the
production process where they have an advantage. People have different skills, talents, and
interests, so they will be better at some jobs than at others. The particular advantages may be based
on educational choices which are in turn shaped by interests and talents. Only those with medical
degrees qualify to become doctors, for instance. For some goods, specialization will be affected
by geography. If you live in or near a big city, it is easier to attract enough customers to operate a
successful dry cleaning business or movie theater than if you live in a sparsely populated rural
area. Whatever the reason, if people specialize in the production of what they do best, they will be
more productive than if they produce a combination of things, some of which they are good at and
some of which they are not.

Second, workers who specialize in certain tasks often learn to produce more quickly and
with higher quality. This pattern holds true for many workers, including assembly line laborers
who build cars, stylists who cut hair, and doctors who perform heart surgery. In fact, specialized
workers often know their jobs well enough to suggest innovative ways to do their work faster and
better. A similar pattern often operates within businesses. In many cases, a business that focuses
on one or a few products (called “core competency”) is more successful than firms that make a
wide range of products.

Third, specialization allows businesses to take advantage of economies of scale which

means that for many goods, as the level of production increases, the average cost of producing
each individual unit declines. For example, if a factory produces only 100 cars per year, each car
will be quite expensive to make on average. However, if a factory produces 50,000 cars each year,
then it can set up an assembly line with huge machines and workers performing specialized tasks,
and the average cost of production per car will be lower. The ultimate result of workers who can
focus on their preferences and talents, learn to do their specialized jobs better, and work in larger
organizations is that society as a whole can produce and consume far more than if each person
tried to produce all of their own goods and services. The division and specialization of labor has
been a force against the problem of scarcity.

Trade and Markets

Specialization only makes sense, though, if workers can use the pay they receive for doing
their jobs to purchase the other goods and services that they need. In short, specialization requires
trade.

You do not have to know anything about electronics or sound systems to play music. You
just buy an iPod or MP3 player, download the music and listen. You do not have to know anything
about artificial fibers or the construction of sewing machines if you need a jacket. You just buy
the jacket and wear it.

You do not need to know anything about internal combustion engines to operate a car. You
just get in and drive. Instead of trying to acquire all the knowledge and skills involved in producing
all of the goods and services that you wish to consume, the market allows you to learn a specialized
set of skills and then use the pay you receive to buy the goods and services you need or want. This
is how our modern society has evolved into a strong economy.

Why Study Economics?

Now that we have gotten an overview on what economics studies, let’s quickly discuss
why you are right to study it. Economics is not primarily a collection of facts to be memorized,
though there are plenty of important concepts to be learned. Instead, economics is better thought
of as a collection of questions to be answered or puzzles to be worked out. Most important,
economics provides the tools to work out those puzzles. If you have yet to be been bitten by the
economics “bug,” there are other reasons why you should study economics.

 Virtually every major problem facing the world today, from global warming, to world poverty,
to the conflicts in Syria, Afghanistan, and Somalia, has an economic dimension. If you are
going to be part of solving those problems, you need to be able to understand them.
Economics is crucial.
 It is hard to overstate the importance of economics to good citizenship. You need to be able
to vote intelligently on budgets, regulations, and laws in general. When the U.S. government
came close to a standstill at the end of 2012 due to the “fiscal cliff,” what were the issues
involved? Did you know?
 A basic understanding of economics makes you a well-rounded thinker. When you read
articles about economic issues, you will understand and be able to evaluate the writer’s
argument. When you hear classmates, co-workers, or political candidates talking about
economics, you will be able to distinguish between common sense and nonsense. You will find
new ways of thinking about current events and about personal and business decisions, as well
as current events and politics.

The study of economics does not dictate the answers but it can show different choices.

Summary

Economics seeks to solve the problem of scarcity, which is when human wants for goods
and services exceed the available supply. A modern economy displays a division of labor, in which
people earn income by specializing in what they produce and then use that income to purchase the
products they need or want. The division of labor allows individuals and firms to specialize and to
produce more for several reasons: a) It allows the agents to focus on areas of advantage due to
natural factors and skill levels; b) It encourages the agents to learn and invent; c) It allows agents
to take advantage of economies of scale. Division and specialization of labor only work when
individuals can purchase what they do not produce in markets. Learning about economics helps
you understand the major problems facing the world today, prepares you to be a good citizen, and
helps you become a well-rounded thinker.

B. OPPORTUNITY COST

Since resources are limited, every time you make a choice about how to use them, you are
also choosing to forego other options. Economists use the term opportunity cost to indicate what
must be given up to obtain something that’s desired. A fundamental principle of economics is that
every choice has an opportunity cost. If you sleep through your economics class, the opportunity
cost is the learning you miss. If you spend your income on video games, you cannot spend it on
movies. If you choose to marry one person, you give up the opportunity to marry anyone else. In
short, opportunity cost is all around us.

The idea behind opportunity cost is that the cost of one item is the lost opportunity to do
or consume something else; in short, opportunity cost is the value of the next best alternative.
Opportunity cost is the value of something when a particular course of action is chosen. Simply
put, the opportunity cost is what you must forgo in order to get something. The benefit or value
that was given up can refer to decisions in your personal life, in a company, in the economy, in the
environment, or on a governmental level. Since people must choose, they inevitably face trade-
offs in which they have to give up things they desire to get other things they desire more.

Opportunity Cost and Individual Decisions

In some cases, recognizing the opportunity cost can alter personal behavior. Imagine, for
example, that you spend $8 on lunch every day at work. You may know perfectly well that bringing
a lunch from home would cost only $3 a day, so the opportunity cost of buying lunch at the
restaurant is $5 each day (that is, the $8 that buying lunch costs minus the $3 your lunch from
home would cost). Five dollars each day does not seem to be that much. However, if you project
what that adds up to in a year—250 workdays a year × $5 per day equals $1,250—it’s the cost,
perhaps, of a decent vacation. If the opportunity cost were described as “a nice vacation” instead
of “$5 a day,” you might make different choices.

Opportunity Cost and Societal Decisions

Opportunity cost also comes into play with societal decisions. Universal health care would
be nice, but the opportunity cost of such a decision would be less housing, environmental
protection, or national defense. These trade-offs also arise with government policies. After the
terrorist plane hijackings on September 11, 2001, many proposals, like the following, were
made to improve air travel safety:
 The government could provide armed “sky marshals” who would travel inconspicuously with
the rest of the passengers. Cost of having a sky marshal on every flight would be roughly $3
billion per year.
 Retrofitting all planes with reinforced cockpit doors to make it harder for terrorists to take over
the plane would have a price tag of $450 million.
 Buying more sophisticated security equipment for airports, like three-dimensional baggage
scanners and cameras linked to face-recognition software, would cost another $2 billion.

However, the single biggest cost of greater airline security doesn’t involve money. It’s the
opportunity cost of additional waiting time at the airport. According to the Department of
Transportation, more than 800 million passengers took plane trips in the US in 2012. Since the
9/11 hijackings, security screening has become more intensive, and consequently, the procedure
takes longer than in the past. Say that, on average, each air passenger spends an extra 30 minutes
in the airport per trip. Economists commonly place a value on time to convert an opportunity cost
in time into a monetary figure. Because many air travelers are relatively highly paid
businesspeople, conservative estimates set the average “price of time” for air travelers at $20 per
hour. Accordingly, the opportunity cost of delays in airports could be as much as 800 million
(passengers) × 0.5 hours × $20/hour or, $8 billion per year. Clearly, the opportunity costs of
waiting time can be just as substantial as costs involving direct spending.

More Examples of Opportunity Cost

 Someone gives up going to see a movie to study for a test in order to get a good grade. The
opportunity cost is the cost of the movie and the enjoyment of seeing it.
 At the ice cream parlor, you have to choose between rocky road and strawberry. When you
choose rocky road, the opportunity cost is the enjoyment of the strawberry.
 A player attends baseball training to be a better player instead of taking a vacation. The
opportunity cost was the vacation.
 Jill decides to take the bus to work instead of driving. It takes her 60 minutes to get there on
the bus and driving would have been 40, so her opportunity cost is 20 minutes.
 This semester you can only have one elective and you want both basket-weaving and choir.
You choose basket weaving and the opportunity cost is the enjoyment and value you would
have received from choir.
 The opportunity cost of taking a vacation instead of spending the money on a new car is not
getting a new car.
 When the government spends Php15 billion on interest for the national debt, the opportunity
cost is the programs the money might have been spent on, like education or healthcare.
 If you decide not to go to work, the opportunity cost is the lost wages.
 For a farmer choosing to plant corn, the opportunity cost would be any other crop he may have
planted, like corn or peanut.
 Tony buys a pizza and with that same amount of money he could have bought a drink and a
hot dog. The opportunity cost is the drink and hot dog.
 You decide to spend Php8000 on some great shoes and do not pay your electric bill. The
opportunity cost is having the electricity turned off, having to pay an activation fee and late
charges. You might also have food in the fridge that gets ruined and that would add to the total
cost.
 As a consultant, you get Php3000 an hour. Instead of working one night, you go to a concert
that costs Php2000 and lasts two hours. Opportunity cost of the concert is Php6000 for two
hours of work.
 David decides to quit working and got to school to get further training. The opportunity cost
of this decision is the lost wages for a year.
 Caroline has Php150,000 worth of stock she can sell now for Php200,000. She wanted to wait
two months because the stock was expected to increase. She decides to sell now. The
opportunity cost would be determined in two months and would be the difference between the
Php200,000 and the price she would have gotten if she sold the stock then.
 Jorge really wants to eat at a new restaurant and can only afford it if he does not order a dessert.
The opportunity cost is the dessert.
 A business owns its building. If the company moves, the building could be rented to someone
else. The opportunity cost of staying there is the amount of rent the company would get.
 When Tobias graduated high school, he decided to go to college. The opportunity cost of going
to college is the wages he gave up working full time for the number of years he was in college.
 Mario has a side business in addition to his regular job. If he decides to spend more time on
his side business, the opportunity cost is the wages he lost from his regular job.
 Mr. Brown makes Php3000 an hour as an attorney and is considering paying someone
Php10,000 to paint his house. If he decides to do it himself, it will take four hours. His
opportunity cost for doing it himself is the lost wages for four hours, or Php12,000.

With these examples you can see what opportunity cost means and how it can apply in different
situations.

What It Means for Individual Investors

If you have trouble understanding the premise, remember that opportunity cost is inextricably
linked with the notion that nearly every decision requires a trade-off. We live in a finite world—
you can't be two places at once.

Explicit Costs

For investors, explicit costs are direct, out-of-pocket payments such as purchasing a stock, an
option, or spending money to improve a rental property. Costs can also be wages, utilities,
materials, or rent. For example, if you own a restaurant and add a new item to the menu that
requires $30 in labor, ingredients, electricity, and water, your explicit cost is $30. Your opportunity
cost is what you could have done with that $30 had you not decided to add the new item to the
menu. You could have given that $30 to charity, spent it on clothes for yourself, or placed it in
your retirement fund and let it earn interest for you. Explicit and implicit costs can be viewed as
out-of-pocket costs (explicit), and costs of using assets you own (implicit).

Implicit Costs

Implicit costs do not represent a financial payment. They're not a direct cost to you, but
rather the lost opportunity to generate income through your resources. If you have a second house
that you use as a vacation home, for instance, the implicit cost is the rental income you could have
generated if you leased it and collected monthly rental checks when you're not using it. It doesn't
cost you anything upfront to use the vacation home yourself, but you are giving up the opportunity
to generate income from the property if you choose not to lease it.
Summary

 A decision always has a lost opportunity.

 Each opportunity has losses and gains.
 The opportunity loss is the opportunity cost.
 The same choice will have different opportunity costs for other people.

C. THE BASIC ECONOMIC DECISIONS

In the previous section we have learned about the scarce means of an economy and the
unlimited wants of people. Because an economy’s production is limited by its resources and
technological knowledge, every society, no matter how rich or poor, makes choices. Thais means
every society must have a way of determining what goods to produce, how to produce, and for
whom to produce.

The Three Problems of Economic Organizations

Every society must have to determine what goods are produced, how these goods are
made, and for whom these goods are produced. These three fundamental questions of economic
organization- what, how and for whom are as crucial today as they were at the dawn of human
civilization.

What goods are produced and in what quantities? A society must determine how much of each
of the many possible goods and services it will make, and when they will be produced. Will we
produce paddy or jute in our field? A few high-breed paddy or much more local paddy will be
produced? Will we use scarce resources to produce consumption goods? Will we produce fewer
consumption goods and more investment goods? Every society has to face this type of questions
or problem. We may call this problem as problem of choice.

How are goods produced? A society must determine who will do the production, with what
resources, and what production techniques will be used. Is electricity generated from natural gas,
coal, or solar power? This problem is called a technological problem.

For whom are goods produced? One key task for a society is to decide who gets to eat the fruit
of the economic efforts. Or, how is the national product divided among different households? Are
many people poor or rich? Do high incomes go to teacher, doctor, businessman or landlords? This
type of problem is called to be problem of distribution.

Proper Utilization of Resources

In every society the resources are scarce in relation to demand. The scarce resources should
be utilized in such a way as to maximize the welfare of the society. In production, resources should
be employed in such a way that they give maximum output at a minimum cost. This is called the
proper utilization of resources. Proper utilization of resources is necessary for solving the
economic problems of the society. Even in personal life, scarce resources should be used for
meeting the necessaries of high priority in order to get the highest satisfaction.
Economic System

One key task for Economics is to study and explain the different ways that a society can
answer the questions what, how and for whom. Different societies are organized through
alternative economic systems and economic studies the different mechanism that a society can use
to allocate its scarce resources. Different types of economic systems prevail in different countries
of the world: market economy, command economy, and mixed economy.

Think about what a complex system a modern economy is. It includes all production of goods and
services, all buying and selling, all employment. The economic life of every individual is
interrelated, at least to a small extent, with the economic lives of thousands or even millions of
other individuals. Who organizes and coordinates this system? Who insures that, for example, the
number of televisions a society provides is the same as the amount it needs and wants? Who insures
that the right number of employees work in the electronics industry? Who insures that televisions
are produced in the best way possible? How does it all get done?

A market economy is one in which individuals and private firms make the major decisions about
production and consumption. In this market consumers are sovereign. Firms produce the
commodity that yield the highest profit. From here you can get answer of the question what. Firms
use the techniques of production which are least costly. From here you can get answer of the
question how. Consumption is determined by individuals' decisions about how to spend the wages
and property ownership. We get the answer of question for whom. United States and most of the
democratic countries, most economic questions are solved by the market.

A command economy is one in which the government makes all decisions about production and
distribution. Soviet Union during most of this century, the government owns most of the means of
production (land and capital);it also owns and directs the operations of enterprise in most
industries; it is the employer of most workers and tells them how to do thier jobs; and the
governmentin a command economy decides how the output of the society is tobe divided among
different goods and services. In this economy, the government answers the major economic
questions through its ownership of resources and its power to enforce decisions.

In recent time no contemporary society falls completely into either market economy or command
economy thus a mixed economy. Almost all societies are mixed economies with elements of
market and command. Like market economy, the private ownership of property, earning of profit
and individual initiative prevail. But, there is also govt. control over the economic activities at the
private level. Besides, some large scale and basic industries and important commercial venture are
run in the public sector.

Sample of Economically Free Countries

Who is in control of economic decisions? Are people free to do what they want and to work where
they want? Are businesses free to produce when they want and what they choose, and to hire and
fire as they wish? Are banks free to choose who will receive loans? Or does the government control
these kinds of choices? Each year, researchers at the Heritage Foundation and the Wall Street
Journal look at 50 different categories of economic freedom for countries around the world. They
give each nation a score based on the extent of economic freedom in each category. The 2015
Heritage Foundation’s Index of Economic Freedom report ranked 178 countries around the world:
some examples of the most free and the least free countries are listed in succeeding table. Several
countries were not ranked because of extreme instability that made judgments about economic
freedom impossible. These countries include Afghanistan, Iraq, Syria, and Somalia.

The assigned rankings are inevitably based on estimates, yet even these rough measures
can be useful for discerning trends. In 2015, 101 of the 178 included countries shifted toward
greater economic freedom, although 77 of the countries shifted toward less economic freedom. In
recent decades, the overall trend has been a higher level of economic freedom around the world.

Most Economic Freedom Least Economic Freedom

1. Hong Kong 167. Timor-Leste
2. Singapore 168. Democratic Republic of Congo
3. New Zealand 169. Argentina
4. Australia 170. Republic of Congo
5. Switzerland 171. Iran
6. Canada 172. Turkmenistan
7. Chile 173. Equatorial Guinea
8. Estonia 174. Eritrea
9. Ireland 175. Zimbabwe
10. Mauritius 176. Venezuela
11. Denmark 177. Cuba
12. United States 178. North Korea

Economic Freedoms, 2015 (Source: The Heritage Foundation, 2015 Index of Economic Freedom,
Country Rankings, http://www.heritage.org/index/ranking)

The Production Possibilities Frontier (PPF)

The PPF is a graph that shows all the different combinations of output of two goods that
can be produced using available resources and technology. It captures the concepts of scarcity,
choice, and tradeoffs. The shape of the PPF depends on whether there are increasing, decreasing,
or constant costs.

Points that lie on the PPF illustrate combinations of output that are productively efficient.
We cannot determine which points are allocatively efficient without knowing preferences. The
slope of the PPF indicates the opportunity cost of producing one good versus the other good, and
the opportunity cost can be compared to the opportunity costs of another producer to determine
comparative advantage.

The PPF and Social Choices

 Just as individuals cannot have everything they want and must instead make choices,
society as a whole cannot have everything it might want, either. This section of the chapter will
explain the constraints faced by society, using the PPF model. There are more similarities than
differences between individual choice and social choice. We will focus on the similarities.

Because society has limited resources (labor, land, capital, raw materials) at any point in
time, there is a limit to the quantities of goods and services it can produce. Suppose a society
desires two products, healthcare and education as illustrated by the following graph.

Society has limited resources and often must prioritize where to invest. This production
possibilities frontier shows a tradeoff between devoting social resources to healthcare and devoting
them to education. At A all resources go to healthcare and at B, most go to healthcare. At D most
resources go to education, and at F, all go to education.

A Healthcare vs. Education Production Possibilities Frontier

Healthcare is shown on the vertical axis and education is shown on the horizontal axis. If
the society were to allocate all of its resources to healthcare, it could produce at point A. But it
would not have any resources to produce education. If it were to allocate all of its resources to
education, it could produce at point F. Alternatively, the society could choose to produce any
combination of healthcare and education shown on the production possibilities frontier. In effect,
the production possibilities frontier plays the same role for society as the budget constraint plays
for a person. Society can choose any combination of the two goods on or inside the PPF. But it
does not have enough resources to produce outside the PPF.

Most important, the production possibilities frontier clearly shows the tradeoff between
healthcare and education. Suppose society has chosen to operate at point B, and it is considering
producing more education. Because the PPF is downward sloping from left to right, the only way
society can obtain more education is by giving up some healthcare. That is the tradeoff society
faces. Suppose it considers moving from point B to point C. What would the opportunity cost be
for the additional education? The opportunity cost would be the healthcare society has to give up.
The opportunity cost is shown by the slope of the production possibilities frontier. By now you
might be saying, “Hey, this PPF is sounding like the budget constraint.” The PPF looks a bit like
a budget constraint. How is it different?

The Shape of the PPF and the Law of Diminishing Returns

The budget constraints presented earlier in this chapter, showing individual choices about what
quantities of goods to consume, were all straight lines. The reason for these straight lines was that
the slope of the budget constraint was determined by the relative prices of the two goods in
the consumption budget constraint. However, the production possibilities frontier for healthcare
and education was drawn as a curved line. Why does the PPF have a different shape?

To understand why the PPF is curved, start by considering point A at the top left-hand side
of the PPF. At point A, all available resources are devoted to healthcare and no resources are left
for education. This situation would be extreme and even ridiculous. For example, children are
seeing a doctor every day, whether they are sick or not, but not attending school. People are having
cosmetic surgery on every part of their bodies, but no high school or college education exists. Now
imagine that some of these resources are diverted from healthcare to education, so that the
economy is at point B instead of point A. Diverting some resources away from A to B causes
relatively little reduction in health because the last few marginal dollars going into healthcare
services are not producing much additional gain in health. However, putting those marginal dollars
into education, which is completely without resources at point A, can produce relatively large
gains. For this reason, the shape of the PPF from A to B is relatively flat, representing a relatively
small drop-off in health and a relatively large gain in education.

Now consider the other end, at the lower right, of the production possibilities frontier.
Imagine that society starts at choice D, which is devoting nearly all resources to education and
very few to healthcare, and moves to point F, which is devoting all spending to education and none
to healthcare. For the sake of concreteness, you can imagine that in the movement from D to F,
the last few doctors must become high school science teachers, the last few nurses must become
school librarians rather than dispensers of vaccinations, and the last few emergency rooms are
turned into kindergartens. The gains to education from adding these last few resources to education
are very small. However, the opportunity cost lost to health will be fairly large, and thus the slope
of the PPF between D and F is steep, showing a large drop in health for only a small gain in
education.

The lesson is not that society is likely to make an extreme choice like devoting no resources
to education at point A or no resources to health at point F. Instead, the lesson is that the gains
from committing additional marginal resources to education depend on how much is already being
spent. If on the one hand, very few resources are currently committed to education, then an increase
in resources used can bring relatively large gains. On the other hand, if a large number of resources
are already committed to education, then committing additional resources will bring relatively
smaller gains.

This pattern is common enough that it has been given a name: the law of diminishing
returns which holds that as additional increments of resources are added to a certain purpose, the
marginal benefit from those additional increments will decline. When government spends a certain
amount more on reducing crime, for example, the original gains in reducing crime could be
relatively large. But additional increases typically cause relatively smaller reductions in crime, and
paying for enough police and security to reduce crime to nothing at all would be tremendously
expensive.

The curvature of the production possibilities frontier shows that as additional resources are
added to education, moving from left to right along the horizontal axis, the original gains are fairly
large, but gradually diminish. Similarly, as additional resources are added to healthcare, moving
from bottom to top on the vertical axis, the original gains are fairly large, but again gradually
diminish. In this way, the law of diminishing returns produces the outward-bending shape of the
production possibilities frontier.

Productive Efficiency and Allocative Efficiency

The study of economics does not presume to tell a society what choice it should make along
its production possibilities frontier. In a market-oriented economy, the choice will involve a
mixture of decisions by individuals, firms, and government. However, economics can point out
that some choices are unambiguously better than others. This observation is based on the concept
of efficiency. In everyday usage, efficiency refers to lack of waste. An inefficient machine operates
at high cost, while an efficient machine operates at lower cost, because it is not wasting energy or
materials. An inefficient organization operates with long delays and high costs, while an efficient
organization meets schedules, is focused, and performs within budget.

The production possibilities frontier can illustrate two kinds of efficiency: productive
efficiency and allocative efficiency. The following graph illustrates these ideas using a production
possibilities frontier between healthcare and education.

Productive and Allocative Efficiency

The graph shows that when a greater quantity of one good increases, the quantity of other
goods will decrease. Point R on the graph represents the good that drops in quantity as a result of
greater efficiency in producing other goods.

Productive efficiency means it is impossible to produce more of one good without

decreasing the quantity that is produced of another good. Thus, all choices along a given PPF like
B, C, and D display productive efficiency, but R does not. Allocative efficiency means that the
particular mix of goods being produced, that is, the specific choice along the production
possibilities frontier, represents the allocation that society most desires.

Productive efficiency means that, given the available inputs and technology, it is impossible to
produce more of one good without decreasing the quantity that is produced of another good. All
choices on the PPF in this graph, including A, B, C, D, and F, display productive efficiency. As a
firm moves from any one of these choices to any other, either healthcare increases and education
decreases or vice versa. However, any choice inside the production possibilities frontier is
productively inefficient and wasteful because it is possible to produce more of one good, the other
good, or some combination of both goods.
For example, point R is productively inefficient because it is possible at choice C to have more of
both goods: education on the horizontal axis is higher at point C than point R (E2 is greater than
E1), and healthcare on the vertical axis is also higher at point C than point R (H2 is great than H1).

The particular mix of goods and services being produced—that is, the specific combination of
healthcare and education chosen along the production possibilities frontier—can be shown as a ray
(line) from the origin to a specific point on the PPF. Output mixes that had more healthcare (and
less education) would have a steeper ray, while those with more education (and less healthcare)
would have a flatter ray.

Allocative efficiency means that the particular mix of goods a society produces represents the
combination that society most desires. How to determine what a society desires can be a
controversial question, and is usually discussed in political science, sociology, and philosophy
classes as well as in economics. Allocative efficiency means producers supply the quantity of
product that consumers demand. Only one of the productively efficient choices will be allocatively
efficient choice for society as a whole.

Why Society Must Choose

Every economy faces two situations in which it may be able to expand consumption of all
goods. In the first case, a society may discover that it has been using its resources inefficiently, in
which case by improving efficiency and producing on the production possibilities frontier, it can
have more of all goods (or at least more of some and less of none). In the second case, as resources
grow over a period of years (e.g., more labor and more capital), the economy grows. As it does,
the production possibilities frontier for a society will shift outward and society will be able to
afford more of all goods.

But improvements in productive efficiency take time to discover and implement, and
economic growth happens only gradually. So, a society must choose between tradeoffs in the
present. For government, this process often involves trying to identify where additional spending
could do the most good and where reductions in spending would do the least harm. At the
individual and firm level, the market economy coordinates a process in which firms seek to
produce goods and services in the quantity, quality, and price that people want. But for both the
government and the market economy in the short term, increases in production of one good
typically mean offsetting decreases somewhere else in the economy.

The PPF and Comparative Advantage

While every society must choose how much of each good it should produce, it does not
need to produce every single good it consumes. Often how much of a good a country decides to
produce depends on how expensive it is to produce it versus buying it from a different country. As
we saw earlier, the curvature of a country’s PPF gives us information about the tradeoff between
devoting resources to producing one good versus another. In particular, its slope gives the
opportunity cost of producing one more unit of the good in the x-axis in terms of the other good
(in the y-axis). Countries tend to have different opportunity costs of producing a specific good,
either because of different climates, geography, technology or skills.
Suppose two countries, the US and Brazil, need to decide how much they will produce of two
crops: sugar cane and wheat. Due to its climatic conditions, Brazil can produce a lot of sugar cane
per acre but not much wheat. Conversely, the U.S. can produce a lot of wheat per acre, but not
much sugar cane. Clearly, Brazil has a lower opportunity cost of producing sugar cane (in terms
of wheat) than the U.S. The reverse is also true; the U.S. has a lower opportunity cost of producing
wheat than Brazil. This can be illustrated by the PPFs of the two countries in the following graphs.

Production Possibility Frontier for the U.S. and Brazil

This graph shows two images. Both images have y-axes labeled “Sugar Cane” and x-axes
labeled “Wheat.” In image (a), Brazil’s Sugar Cane production is nearly double the production of
its wheat. In image (b), the U.S.’s Sugar Cane production is nearly half the production of its wheat.

The U.S. PPF is flatter than the Brazil PPF implying that the opportunity cost of wheat in
term of sugar cane is lower in the U.S. than in Brazil. Conversely, the opportunity cost of sugar
cane is lower in Brazil. The U.S. has comparative advantage in wheat and Brazil has comparative
advantage in sugar cane.
When a country can produce a good at a lower opportunity cost than another country, we say that
this country has a comparative advantage in that good. In our example, Brazil has a comparative
advantage in sugar cane and the U.S. has a comparative advantage in wheat. One can easily see
this with a simple observation of the extreme production points in the PPFs of the two countries.
If Brazil devoted all of its resources to producing wheat, it would be producing at point A.
However, if it had devoted all of its resources to producing sugar cane instead, it would be
producing a much larger amount, at point B. By moving from point A to point B Brazil would give
up a relatively small quantity in wheat production to obtain a large production in sugar cane. The
opposite is true for the U.S. If the U.S. moved from point A to B and produced only sugar cane,
this would result in a large opportunity cost in terms of foregone wheat production.

The slope of the PPF gives the opportunity cost of producing an additional unit of wheat.
While the slope is not constant throughout the PPFs, it is quite apparent that the PPF in Brazil is
much steeper than in the U.S., and so, the opportunity cost of wheat is generally higher in Brazil.
Nations’ differences in comparative advantage determine which goods they will choose to produce
and trade. When countries engage in trade, they specialize in production of the goods that they
have a comparative advantage, and trade part of production for goods they do not have a
comparative advantage. With trade, goods are produced where the opportunity cost is lowest, so
production increases, benefiting both trading parties.
Summary

A production possibilities frontier defines the set of choices society faces for the
combinations of goods and services it can produce given the resources available. The shape of the
PPF is typically curved outward, rather than straight. Choices outside the PPF are unattainable and
choices inside the PPF are wasteful. Over time, a growing economy will tend to shift the PPF
outwards. The law of diminishing returns holds that as increments of additional resources are
devoted to producing something, the marginal increase in output will become smaller and smaller.
All choices along a production possibilities frontier display productive efficiency; that is, it is
impossible to use society’s resources to produce more of one good without decreasing production
of the other good. The specific choice along a production possibilities frontier that reflects the mix
of goods society prefers is the choice with allocative efficiency. The curvature of the PPF is likely
to differ by country, which results in different countries having comparative advantage in different
goods. Total production can increase if countries specialize in the goods they have comparative
advantage in and trade some of their production for the remaining goods.

D. THE ECONOMIC WAYS OF REASONING

1. Economic Theory and Its Models

John Maynard Keynes (1883–1946), one of the greatest economists of the twentieth
century, pointed out that economics is not just a subject area but also a way of thinking. Keynes,
famously wrote in the introduction to a fellow economist’s book: “Economics is a method rather
than a doctrine, an apparatus of the mind, a technique of thinking which helps its possessor to draw
correct conclusions.” In other words, economics teaches you how to think, not what to think.

Economists see the world through a different lens than anthropologists, biologists,
classicists, or practitioners of any other discipline. They analyze issues and problems with
economic theories that are based on particular assumptions about human behavior different than
the assumptions an anthropologist or psychologist might use. A theory is a simplified
representation of how two or more variables interact with each other. The purpose of a theory is
to take a complex, real-world issue and simplify it down to its essentials. If done well, this enables
the analyst to understand the issue and any problems around it. A good theory is simple enough to
be understood, while complex enough to capture the key features of the object or situation being
studied.

Sometimes economists use the term model instead of theory. Strictly speaking, a theory is
a more abstract representation, while a model is more applied or empirical representation. Models
are used to test theories, but for this course we will use the terms interchangeably.

For example, an architect who is planning a major office building will often build a physical
model that sits on a tabletop to show how the entire city block will look after the new building is
constructed. Companies often build models of their new products, which are more rough and
unfinished than the final product will be, but can still demonstrate how the new product will work.
A good model to start with in economics is the circular flow diagram. It pictures the economy as
consisting of two groups, households and firms that interact in two markets: the goods and
services market in which firms sell and households buy and the labor market in which
households sell labor to business firms or other employees.

The circular flow diagram shows how households and firms interact in the goods and
services market, and in the labor market. The direction of the arrows shows that in the goods and
services market, households receive goods and services and pay firms for them. In the labor
market, households provide labor and receive payment from firms through wages, salaries, and
benefits.
Of course, in the real world, there are many different markets for goods and services and markets
for many different types of labor. The circular flow diagram simplifies this to make the picture
easier to grasp. In the diagram, firms produce goods and services, which they sell to households in
return for revenues. This is shown in the outer circle, and represents the two sides of the product
market (for example, the market for goods and services) in which households demand and firms
supply. Households sell their labor as workers to firms in return for wages, salaries and benefits.
This is shown in the inner circle and represents the two sides of the labor market in which
households supply and firms demand.
This version of the circular flow model is stripped down to the essentials, but it has enough features
to explain how the product and labor markets work in the economy. We could easily add details
to this basic model if we wanted to introduce more real-world elements, like financial markets,
governments, and interactions with the rest of the globe (imports and exports).

Economists carry a set of theories in their heads. When they see an economic issue or
problem, they go through the theories they know to see if they can find one that fits. Then they use
the theory to derive insights about the issue or problem. In economics, theories are expressed as
diagrams, graphs, or mathematical equations. Economists do not figure out the answer to the
problem first and then draw the graph to illustrate. Rather, they use the graph of the theory to help
them figure out the answer. Although at the introductory level, you can sometimes figure out the
right answer without applying a model, if you keep studying economics, before too long you will
run into issues and problems that you will need to graph to solve. Both micro and macroeconomics
are explained in terms of theories and models. The most well-known theories are probably those
of supply and demand but you will learn a number of others.

2. Ceteris Paribus Assumption

The Latin phrase ceteris paribus means "all other things remaining equal". Because there
are multiple factors influencing any one variable, economists apply this assumption in order to
segregate the effect that one factor has on the variable in the question, keeping all other factors
unchanged. In other words, if we want to examine the effect of one (independent) variable on
another (dependent) variable, we need to ensure, through the ceteris paribus assumption, that the
effect of other independent variables on the dependent variable is constant. Experts use it to explain
the theory behind laws of economics and nature. It means that most of the time, something will
occur as a result of something else. That is, of course, if nothing else changes. We will encounter
this term quite often throughout this course.

When ceteris paribus is employed in economics, all other variables with the exception of the
variables under evaluation are held constant. An example of the use of ceteris paribus in
microeconomics is: what would happen for the demand for a normal good when income increases,
ceteris paribus.

Economics seeks to interpret, analyze and or evaluate situations that occur between
individuals, firms and other entities. Due to the potential for multiple agents and other known and
unknown external activities to be involved or present but not relevant to an analysis, economics
employs the assumption of "all else constant," which is the English translation of the Latin phrase
"ceteris paribus". When the ceteris paribus assumption is employed in economics, all other
variables with the exception of the variables under evaluation are held constant.

Use in Economics

The concept and phrase of ceteris paribus are used extensively in economics. That's
because there are so many variables constantly changing. The law of gravity is easy to understand
because it's rare for something else to intervene. The bathroom scale will almost always fall to the
ground.
That's not the case in economics. Everything is always changing. That makes it harder to create
economic laws than physical laws. That's where ceteris paribus makes economics simple. It allows
you to imagine a situation where only two variables change. You can focus on how a change in
the independent variable affects the dependent variable.

Here's how an economist might use ceteris paribus to explain the law of demand. You'll
need to focus on the independent variable, demand, and the dependent variable, price. The law of
demand states, "If demand drops - ceteris paribus - then prices will fall to meet demand." It lets
you know that the only two variables under discussion are price and demand. If demand drops, all
other things being equal, prices will too. In other words, when people want less of a good or
service, then sellers will lower the prices. They could cut back on manufacturing to
lower supply and keep prices the same. Or they could update the product to stimulate demand.
That's what Apple does to maintain high prices. Sometimes manufacturers can't lower the price
because their costs are too high. In that case, they'll accept a lower volume. In the real world, all
other things are never equal. But using the concept of ceteris paribus allows you to understand the
theoretical relationship between cause and effect.

The economic law of demand is like the physical law of gravity. When you throw the
bathroom scale out the window, and it comes right back at you, you don't assume the law of gravity
was suspended. You look for what else has changed. Similarly, if demand drops and prices go up,
the law of demand is still operable. But you now know to look for the other things that are no
longer equal.
3. Rational Assumptions

Rational choice theory (theory of rational choice, choice theory or rational action theory)
is a framework for understanding and often formally modeling social and economic behavior. The
basic premise of rational choice theory is that aggregate social behavior results from the behavior
of individual actors each of whom is making their individual decisions. The theory also focuses on
the determinants of the individual choices (methodological individualism).

Rational choice theory then assumes that an individual has preferences among the available
choice alternatives that allow them to state which option they prefer. These preferences are
assumed to be complete (the person can always say which of two alternatives they consider
preferable or that neither is preferred to the other) and transitive (if option A is preferred over
option B and option B is preferred over option C, then A is preferred over C). The rational agent is
assumed to take account of available information, probabilities of events, and potential costs and
benefits in determining preferences, and to act consistently in choosing the self-determined best
choice of action. In simpler terms, this theory dictates that every person, even when carrying out
the most mundane of tasks, perform their own personal cost and benefit analysis in order to
determine whether the action is worth pursuing for the best possible outcome. And following this,
a person will choose the optimum venture in every case. This could culminate in a student deciding
on whether to attend a lecture or stay in bed, a shopper deciding to provide their own bag to avoid
the five pence charge or even a voter deciding which candidate or party based on who will fulfill
their needs the best on issues that have an impact on themselves especially.
Rationality is widely used as an assumption of the behavior of individuals in microeconomic
models and analyses and appears in almost all economics textbook treatments of human decision-
making. A particular version of rationality is instrumental rationality which involves seeking the
most cost-effective means to achieve a specific goal without reflecting on the worthiness of that
goal.

Rational choice theorists do not claim that the theory describes the choice process but
rather that it predicts the outcome and pattern of choices. An assumption often added to the rational
choice paradigm is that individual preferences are self-interested in which case the individual can
be referred to as a homo oeconomicus. Such an individual acts as if balancing costs against
benefits to arrive at action that maximizes personal advantage. Proponents of such models do not
claim that a model's assumptions are an accurate description of reality only that they help formulate
clear and falsifiable hypotheses. In this view, the only way to judge the success of a hypothesis
is empirical test.

Human action that is in rational choice theory has been described as outcome of two
choices. First, those feasible region will be chosen within all the possible and related action.
Second, after the preferred option has been chosen, the feasible region that has been selected was
picked based on restriction of financial, legal, social, physical or emotional restrictions that the
agent is facing. After that, a choice will be made based on the preference order. Rational choice
theory uses a narrower definition of rationality. At its most basic level, behavior is rational if it is
goal-oriented, reflective (evaluative), and consistent.
 Early neoclassical economists writing about rational choice, assumed that agents make
consumption choices so as to maximize their happiness or utility. Contemporary theory bases
rational choice on a set of choice axioms that need to be satisfied, and typically does not specify
where the goal (preferences, desires) comes from. It mandates just a consistent ranking of the
alternatives. Individuals choose the best action according to their personal preferences and the
constraints facing them. Example: There is nothing irrational in preferring fish to meat the first
time but there is something irrational in preferring fish to meat in one instant and preferring meat
to fish in another, without anything else having changed.

Actions, Assumptions and Individual Preferences

The premise of rational choice theory as a social science methodology is that the aggregate
behavior in society reflects the sum of the choices made by individuals. Each individual, in turn,
makes their choice based on their own preferences and the constraints (or choice set) they face.

At the individual level, rational choice theory stipulates that the agent chooses the action
(or outcome) they most prefer. In the case where actions (or outcomes) can be evaluated in terms
of costs and benefits, a rational individual chooses the action (or outcome) that provides the
maximum net benefit, i.e., the maximum benefit minus cost.

The theory applies to more general settings than those identified by costs and benefit. In
general, rational decision making entails choosing among all available alternatives the alternative
that the individual most prefers. The "alternatives" can be a set of actions ("what to do?") or a set
of objects ("what to choose/buy"). In the case of actions, what the individual really cares about are
the outcomes that results from each possible action. Actions, in this case, are only an instrument
for obtaining a particular outcome. The available alternatives are often expressed as a set of
objects.

The theory makes two technical assumptions about individuals' preferences over
alternatives: Completeness-for any two alternatives ai and aj in the set, either ai is preferred to aj,
or aj is preferred to ai, or the individual is indifferent between ai and aj. In other words, all pairs of
alternatives can be compared with each other. Transitivity-if alternative a1 is preferred to a2, and
alternative a2 is preferred to a3, then a1 is preferred to a3.

Together these two assumptions imply that given a set of exhaustive and exclusive actions
to choose from, an individual can rank the elements of this set in terms of his preferences in an
internally consistent way (the ranking constitutes a partial ordering), and the set has at least
one maximal element.

The preference between two alternatives can be: strict preference occurs when an
individual prefers a1 to a2 and does not view them as equally preferred; weak preference implies
that individual either strictly prefers a1 over a2 or is indifferent between them; and
indifference occurs when an individual neither prefers a1 to a2, nor a2 to a1. Since (by
completeness) the individual does not refuse a comparison, they must therefore be indifferent in
this case. These assumptions or axioms are not completely general and might at best be regarded
as approximations.
Additional assumptions

1. Perfect information: The ranking between two alternatives involves no uncertainty.

2. Choice under uncertainty: The individual effectively chooses between lotteries, where each
lottery induces a different probability options over outcomes. The additional assumption
of independence of irrelevant alternatives then leads to expected utility theory.
3. Inter-temporal choice: When decisions affect choices at different points in time, the standard
method for evaluating alternatives across time involves discounting future payoffs.
4. Limited cognitive ability: Identifying and weighing each alternative against every other may
take time, effort, and mental capacity. Recognizing the cost that these impose or cognitive
limitations of individuals gives rise to theories of bounded rationality.

Alternative theories of human action reflects the empirical finding that, contrary to standard
preferences assumed under neoclassical economics, individuals attach extra value to items that
they already own compared to similar items owned by others. Under standard preferences, the
amount that an individual is willing to pay for an item is assumed to equal the amount he or she is
willing to be paid in order to part with it. In experiments, the latter price is sometimes significantly
higher than the former do not characterize loss aversion as irrational.

Summary
Economists analyze problems differently than do other disciplinary experts. The main tools
economists use are economic theories or models. A theory is not an illustration of the answer to a
problem. Rather, a theory is a tool for determining the answer.
To explain economic behavior, economists may opt to simplify the economic mechanism.
Two or three variables are isolated while all others are assumed as constant, unchanging or in the
state of ceteris paribus. This facilitates the study of causative effects among the segregated
variables. Although the ceteris paribus methodology cannot predict absolutes or certainties, it
offers base knowledge of tendencies or probabilities.

APPLICATION (Written task). In not more than 1,000 words, answer the following:
1. Develop ways on managing scarcity by identifying at least three scarce resources, with its key
uses, the proposed substitute and the alternative measure to better manage the resources. – June
21, 2021

2. Application of Production Possibilities Frontier (PPF) – June 21, 2021

3. Write the economic profile of your locality (Demographics – population, abundant resources,
means of livelihood, industries) –June 21, 2021
ASSESSMENT

For ten (10) points each, answer the following questions briefly.

1. What are the reasons to study economics? What is scarcity? Can you think of two causes of
scarcity? What are the basic economic problems? Describe each. Could a nation be producing
in a way that is allocatively efficient but productively inefficient?
2. Explain why division of labor increases an economy’s level of production. Why would division
of labor without trade not work? Explain each economic system and give examples for each.
(June 23, 2021 – BAC 101 2:30 PM)
3. A consultant works for P200 per hour. She likes to eat vegetables but is not very good at
growing them. Why does it make more economic sense for her to spend her time at the
consulting job and shop for her vegetables?
4. What does a production possibilities frontier illustrate? Why is a production possibilities
frontier typically drawn as a curve, rather than a straight line? Explain why societies cannot
make a choice above their production possibilities frontier and should not make a choice below
it. (June 23, 2021 – BAC 101 10:30AM)
5. What is an example of a problem in the world today that has an economic dimension? How
did John Maynard Keynes define economics? Are households primarily buyers or sellers in
the goods and services market? Are firms primarily buyers or sellers in the goods and services
market? (June 23, 2021 – BAC 101 4:00 PM)

ASSIGNMENT

For 10 points each, answer the following:

1) Explain: “Making decisions requires trading off one goal against another.” (June 28, 2021 –
BAC 101 10:30AM)
2) What makes an economy become efficient? How can the economy achieve equity?
6. How can each of us become productive and contribute to the growth and development of the
economy? (June 28, 2021 – BAC 101 2:30 PM)
3) As the population increases, demand likewise increases resulting to increases in prices of goods
and services. Is this statement true or not? Defend your answer.
7. A lot of people are poor as they are financially hard up. Must the government print more money
for them to escape the grasp of poverty? What will induce the government to print more
money? (June 28, 2021 – BAC 101 4:00 PM)

REFERENCE

Principles of economics (n.d.). Retreived January 12, 2021 from

https://opentextbc.ca/principlesofeconomics