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A short class with Sarah and her students. The other ways are under More.
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Why can't a country simply produce everything its people want?
Because land, labour, capital and entrepreneurship are limited, but wants are unlimited.
Exactly, that is scarcity. So what does the question 'what to produce?' ask?
Which goods and services to make, and how much of each, with the resources we have.
If a town uses its budget to build a hospital instead of a school, what is the opportunity cost?
The school, because it was the next best thing they gave up.
Right. Every answer to 'what to produce' has an opportunity cost.
Our economy moves from point B, 90 food and 10 machines, to point C, 70 food and 20 machines. What is the opportunity cost of each extra machine?
We lose 20 food for 10 machines, so 2 units of food per machine.
And from C to D, where food falls to 40 and machines rise to 30?
We lose 30 food for 10 machines, so 3 per machine. The cost is rising.
Why does it rise?
Because the resources we move later are better at farming than at making machines.
Exactly. And a point inside the curve shows unemployed or wasted resources.
In a market economy, how do firms know what to produce?
From prices and profits. If people buy more of something, its price and profit rise, so firms make more.
That's consumer sovereignty. What does a market tend to under-produce?
Public goods like street lighting and merit goods like education and healthcare.
And in a planned economy?
The government sets targets, like the Soviet Union's Five-Year Plans for heavy industry, but planners may not know what consumers want.
So a mixed economy, like India's, lets markets decide most things while the government fills the gaps.
The decision about which goods and services, and how much of each, to make with scarce resources.
Every production choice gives up the next best alternative.
The curve shows possible combinations, and the cost of extra units usually rises.
More capital goods today mean less consumption now but greater production later.
Markets use prices and profits, planned economies use targets, and mixed economies combine both.
Opportunity cost on a PPC: Moving from 90 food and 10 machines to 70 food and 20 machines costs 2 units of food for each extra machine.
Planned economy: The Soviet Union's Five-Year Plans from 1928 directed resources towards heavy industry rather than consumer goods.
Mixed economy: In India, firms decide most production for the market, while the government provides public goods such as roads and merit goods such as public schools and hospitals.
Choose one thing, lose another; the cost is the chance you couldn't cover.
An island community can catch fish or build boats. When they build their first boat, they lose only a few fish, because the weakest fishermen do the building. When they build the fifth boat, their best fishermen are in the boatyard, and the fish catch falls sharply.
Market: price tells; Plan: state tells; Mixed: both tell.
S.O.C. - Scarcity forces a choice, Opportunity cost is the price, Capital or consumer goods is the big decision.
Term
What does the question "what to produce?" ask?
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Define opportunity cost.
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Why does a PPC usually bow outwards?
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What does a point inside the PPC show?
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In a market economy, what signals what to produce?
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The basic economic problem that resources are limited while wants are unlimited.
The value of the next best alternative given up when a choice is made.
A curve showing the maximum combinations of two goods an economy can produce when all its resources are used efficiently.
Goods bought to satisfy wants directly, such as food and clothing.
Man-made goods used to produce other goods and services, such as machines and roads.
The idea that, in a market economy, consumers' spending decides what is produced.
Goods such as street lighting and national defence that markets under-provide because people cannot easily be stopped from using them without paying.
Goods such as education and healthcare that benefit society and tend to be under-consumed if left entirely to the market.
"What to produce?" is the first of the three basic economic questions: which goods and services, and how much of each, should an economy make with its scarce resources? Every answer has an opportunity cost, and market, planned and mixed economies reach their answers in different ways.
Because resources are scarce, producing more of one good means producing less of another, so every society must decide what to produce and in what quantities. A production possibility curve (PPC) shows the combinations an economy can make and the opportunity cost of moving between them, which usually rises as more of one good is produced. Choosing between consumer goods for today and capital goods for the future is one of the most important versions of the question. In a market economy, consumer spending and the profit motive signal what to produce; in a planned economy, the government sets output targets; and in a mixed economy, markets decide most production while the government provides public and merit goods and discourages harmful ones.
Every society faces scarcity: its land, labour, capital and entrepreneurship are limited, while people's wants are unlimited. The first basic economic question asks which goods and services to produce with those limited resources, and how much of each. Should a country grow more food or build more factories? Train more doctors or buy more fighter jets? Build highways or railways?
Choosing to produce one thing means giving up the chance to produce something else. The value of the next best alternative given up is the opportunity cost. If a government uses a plot of land and its budget for a hospital, the opportunity cost might be the school that could have been built there instead.
A production possibility curve (PPC) shows the maximum combinations of two goods an economy can produce when it uses all its resources efficiently. Suppose an economy can produce food and machines:
Moving from A to B costs 10 food for 10 machines, or 1 unit of food per machine. From B to C it costs 20 food, or 2 per machine; from C to D, 30 food, or 3 per machine; and from D to E, 40 food, or 4 per machine. The opportunity cost rises because resources are not equally suited to both goods: the first workers and land moved into making machines are the ones least useful for farming, but later the economy must give up its best farmland and farmers. That is why a PPC usually bows outwards.
A point inside the curve means some resources are unemployed or used inefficiently. A point outside the curve cannot be reached with today's resources and technology.
Consumer goods, such as food and clothes, satisfy wants now. Capital goods, such as machines, roads and power plants, are used to produce other goods. An economy that devotes more resources to capital goods today gives up some consumption now, but it can produce more in the future, which shows up as its PPC shifting outwards over time.
A society's decision depends on the basic needs of its people, consumer preferences, the resources and technology it has, government priorities such as health or defence, opportunities to trade, and increasingly on sustainability, for example whether to invest in renewable energy instead of fossil fuels.