3. What is a PPC or PPF??
• The production possibility frontier
(PPF) is a curve depicting all maximum
output possibilities for two or more
goods given a set of inputs (resources,
labor, etc.). The PPF assumes that all
inputs are used efficiently.
4. • Compare 2 variables; goods or services
• Trade-offs or opportunity cost involved
• All available resources are fully employed
• All available technology is fully employed
• Productive efficiency: Resources are
employed in the least costly way
• Technology and production techniques remains
constant within the time of consideration
Abstractions and Assumptions of
a PPC
6. Opportunity costs v shape of
the PPC
• Increasing opportunity costs
– Concave to the origin
• Decreasing opportunity costs
– Convex to the origin
• Constant opportunity costs
– Straight line curve
• Zero opportunity costs
– Parallel curve
9. Q. Fill in the following table and draw
the PPC
Good X Good Y Opportunity cost of Y
1000 0
900 100
750 200
550 300
300 400
0 500
10. Reasons for increasing
opportunity costs
• Resources are not homogenous
• Techniques of production used to
produce different goods are different
• The differences of efficiencies among
industries
• A resource that is more appropriate to
produce a particular good is not so
appropriate to produce another good
12. Q. Give example for situations where
opportunity cost becomes zero
• Using resources which are unlimitedly
available
• When there are no alternative uses for
the resource
• When resources are not fully utilized
23. Alternative options
Good X
Good Y0
A
B
C
D
E
A society
can choose
to produce
any product
combination
represente
d by letters
A,B,C,D or
E
24. Unemployment of resources
Good X
Good Y0
A
Point A shows
unemployment
of resources.
Here in this
case
resources are
either wasted
or not used
25. Under-utilization of resources
Good X
Good Y0
A
Point A shows
under
utilization of
resources.
Here in this
case
resources are
either wasted
or not used
26. Idle resources
Good X
Good Y0
A
Point A shows
existence of
idling
resources. In
this case
resources are
not managed
well
37. Shifts in PPC
• A PPC may shift rightward or leftward
due to
– Change in factors of production
– Change in factors of productivity
Either
– Quality wise OR
– Quantity wise
75. What is an economic
system????????
• An economic system is the way in which
an economy is formed based on their
characteristics, features, culture and
traditions etc.
76. Characteristics of an economic
system
• Resource ownership by either feudal
lord, private sector or public sector
• Existence of a governing body
• The target market i.e. either poor, rich
or community
• Driving motive i.e. profit or social
welfare
77. What are the reasons for the existence
of variety of economic systems?
• Variety in resource allocation
• Difference in ownership of resources
• Differences in culture
• Difference in governing body i.e. state
or private sector
• Difference in traditions
78. What are the basic types of
economic systems?
• Command/planned/socialistic economy
• Market economy
• Mixed economy
• Transitional economy
79. Different types of entities that can
be seen in an economic system
• Households
• Business firms
• Government
• Labour organizations
• Non governmental organizations
• Markets
80. Functions of an economic
system
• Determining what commodities are
produced and in what quantities.
• Selection of the production technique.
• Taking the distribution decisions.
81. Criteria that can be used to
evaluate an economic system
• Full employment
• Economic efficiency
• Economic growth
• Price stability
• External stability
• Quality of government
• Economic freedom
• Fair distribution of income & wealth
82.
83. Traditional economy
• Based on traditions and customs
• Was governed by a feudal lord
• No formal structure
• Barter was the main form of trade
• The resources, lands were owned by the
feudal lord
84. Command/planned/socialistic
economy
• State ownership of resources/factors of
production except labour
• Less disparity of income
• Decisions are taken by a centrally planned
authority
• All activities are controlled by the government
• Less/no competition
• Based on social welfare
• No consumer sovereignty
85. What is consumer
sovereignty???
• Consumer sovereignty refers the ability
of consumers to influence decisions
taken by governing party.
• Consumer sovereignty exist in a market
economy where demand curve denotes
the choices or preferences of
consumers
86. Reasons for the failure of
socialistic economy
• Lack of a planning mechanism
• Inefficiencies in the public sector
• Political interference
• Lack of motivation
• Tall structures
• Bribery and corruption
• High administrative costs
87. Market economy
• Private ownership of resources, factors
of production
• Existence of a price mechanism
• Consumer sovereignty
• Competition between both consumers
and producers
• Based on self interests
• Entrepreneurs are based on the motive
of profits
88. Price mechanism
• The system in which the basic economic
problems are solved with the use of
price can be simply known as price
mechanism
• There are three functions of price in a
market economy.
• They are
– Signaling function-gives information
– Incentive function-gives a motive
– Rationing function-allocation idea
89. Functions of profit
• Profit encourages innovations
• Resource allocation is done effectively
• Profit is a market signal
• Higher profits increases the MPS
90. Invisible hand theory
• In a market economy the free market forces
decides the prices and quantities of goods and
services to be produced
• The buyers and producers decisions are affected
by their self interests
– Consumers; maximum utility
– Producers; maximum profits
• These producers and consumers decisions are
contradicting to each other and they are
controlled by the price
• Thus price is called an invisible hand in a market
economy.
92. Transitional economy
• A transition economy or transitional
economy is an economy which is changing
from a centrally planned economy to a
market economy.
Command
economy
Market
economy
93.
94.
95. Examples
Transitional Command Market Mixed
Russia
China
Ukraine
Poland
Hungary
Romania
Vietnam
Uzbekistan
Kazakhstan
Czech Rep
Cuba
North Korea
China
Soviet Union
Canada
UK
Germany
Netherlands
USA
Sri Lanka
India
Pakistan
