Economics Essay Sample on Introduction to Economics

Introduction to Economics

Modern economists define economics as the study of how man allocates limited resources, which have alternate uses, to achieve given ends or goals. From the definition of economics comes one of the Studies biggest challenges. Resources have a prevailing characteristic of being scarce, hence it begs the question, and ‘how does one achieve maximum productivity in an environment of scarce resources?’ ( McEachern, 2011 p 30).This paper is aimed at understanding how the employment of efficiency in economics is attained by the use of a production possibility frontier curve.

Graphic Illustration of a PPF Curve.

 Production Possibilities Frontier (PPF) refers to the maximum combinations of goods and services an economy can produce efficiently using its available resources and technology within a given period of time. The PPF curve illustrates the concept of scarcity, trade-offs and opportunity cost. It also explains the concept of marginal cost and marginal benefit. It explains the concept of efficiency and shows explain how we can expand production by accumulating capital and improving technology. ( McEachern, 2011 p 27).

The PPF assumes:

Two Goods. The PPF curve can only assume economic comparison of only two kinds of commodities at a time. For example, it assumes that there are only good y in a case capital goods and good x in a case consumer goods in the economy. This postulation consents scholars to use graphs to analyze the compromises between goods.

Common Resources. The PPF curve assumes a hypothesis is that the production of either goods comes from the same resources.

Full Employment. The PPF curve assumes full employment of resources. All resources must be fully employed in order for the economy to be operating on the PPF, any changes in the employment of resources will cause movement of the curve either inwards or outwards.

Fixed Technology. The PPF curve assumes that the technology used to attain efficiency is the same for both goods in the economic comparison. Because of this assumption an increase of technology will blow the curve outwards at the same rate though this is theoretical and not practical in the real world.

Fixed Resources. The PPF curve assumes because the goods are produced from the use of a singular resource then the resource is fixed. A change in terms of discovery has a similar change to both goods. It should be noted that this assumption is more theoretical than practical

It should be noted that some of these assumptions (full employment and two goods) are only realistic for the short run but not for the long run.

Inward Movement of the PPF Curve

The movement of the PPF curve inwards means that productivity is not being met at the current period. Inefficient production stipulates that though the nation has available resources to enhance economic growth, it is not employing enough to harness its full potential towards development ( McEachern, 2011 p 27).

From the illustration from figure 1, a shift inward would cause the PPF curve to move to point M. this shift inwards could be a result of;

Countries lack of adoptability to modern technology. The PPF curve assumes a Ceteris Paribus notion to its function. It assumes that technology is constant yet it is well known that technological growth enhances productivity hence the y position on the graph. However, if a nation refuses or in un able to change its technology it terms of accessing and utilizing the available resources they remain at a point if inefficiency.

When a county’s resources are embezzled or underutilized then the  country may find itself at position M. for instance, if a country is plugged with corruption and unqualified personnel is employed then due to lack of know how productivity will go down. It can be explained in the inverse that if a country has less corruption the concurrently only qualified labour can be employed to perform their respective duty in production hence increasing productivity labour is a primary aspect in the growth of a nation.

Outward Movement of the Production Possibilities Frontier:

Illustration of a blown out PPF curve

As shown in the above graphical illustration, the movement the PPF outwards is caused by increased efficiency. There are four means to move the PPF outward; this movement is reflection to as economic growth (McEachern 2011 p.27-28).

Increase the quantity of resources. An increase of a factor of production will move the curve outwards. For instance, migration intensifies the workforce supply and the detection of new oil fields increases the quantity of natural resources.

Improve the technology. The production possibilities frontier assumes constant technology. However, the discovery of more a proficient means of production will move the PPF outward.

Select a provision of commodities that have capital accumulation. This statement means that the value of opportunity cost has to be decreased and marginal benefit increased.

It has to be noted that out ward change ratio in case where there may be a discovery of resources or introduction of a new technology may favour one product.

Figure 3:  illustration graph e of an economy that produces farm goods and factory goods

Point on PPC Farm goods Factory goods
b 10 700
c 20 650
e 60 400
f 70 120

From the illustration above from figure 3, it can be established that with scarcity comes choice, and opportunity cost. The movement of production from point b to c is the choice hence the resulting reduction in terms of production of factory goods is the opportunity cost. Opportunity costs described as what is waived in order to have something else. In this case, the choice of producing an extra ten tons of farm goods results to an opportunity cost fifty tons of factory goods.

In regards to factory goods, the opportunity cost of moving from point b to c is fifty tons, while the opportunity cost of moving from e to f is two hundred and eighty tons. However, in this case the opportunity cost of producing an extra unit of a good is the marginal cost of that good. It is calculated as the following

Opportunity cost of producing one more unit= quantity of the good you must give up

                                                                           Quantity of the good you will get

O.C (b to c) =50   = 5

                     10

O.C (e to f) =280 = 28

                       10

From the result of the calculation, we can prove that there is greater opportunity cost from the movement e to f than the movement from b to c. an illustration of the law of comparative advantage. (McEachern,2011 p.24).

References

McEachern, W. A. (2011). Microeconomics. Mason, Ohio: South-Western.