THE ECONOMIC PROBLEM

Presented

by

MOHAMED ABD-ELMOHSEN Assistant lecture

Economic departmentFaculty of commerce Suez canal university

Introduction Definition Explanation

Economics is the social science that studies the choices that individuals, businesses, governments, and societies make as they cope with scarcity and the incentives that influence and reconcile those choices

Microeconomics is the study of choices made by individuals and businesses, and the influence of government on those choices.

Macroeconomics is the study of the effects on the national and global economy of the choices that individuals, businesses, and governments make.

Big Economic Questions

What we produce changes over timeHow? Make combination of factors of production (Land- Labor- Capital- Entrepreneurship) For Whom?

Land earns rent. Labor earns wages.

Capital earns interest Entrepreneurship earns profit.

Production Possibilities and Opportunity Cost

The production possibilities frontier (PPF) is the boundary between those combinations of goods and services that can be produced and those that cannot.

Points inside and on the frontier, such as points A, B, C, D, E, F, and Z are attainable.

Any point inside the frontier, such as point Z, is inefficient.

At such a point it is possible to produce more of one good without producing less of the other good.

At Z, resources are either unemployed or misallocated.

Using Resources Efficiently

The marginal cost of a good or service is the opportunity cost of producing one more unit of it.

Figure 2.2 illustrates the marginal cost of pizza.

As we move along the PPF in part a (shown here) the opportunity cost and the marginal cost of pizza increases.

.

Using Resources Efficiently

In this chart (shown here) the blocks illustrate the increasing opportunity cost of pizza

The black dots,

and the line labeled MC

show the marginal cost of pizza

MC→→ production

Using Resources EfficientlyThe marginal benefit of a good or service is the benefit received from consuming one more unit of it.

Figure 2.3 shows a marginal benefit curve.

The curve slopes downward to reflect the principle of decreasing marginal benefit.

At point A, with pizza production at 0.5 million, people are willing to pay 5 CDs per pizza.

We measure marginal benefit by the amount that a person is willing to pay for an additional unit of a

good or service.

MB→→ Consumption

Efficient Use of Resources

When we cannot produce more of any one good without giving up some other good that we value more highly, we have achieved allocative efficiency, and we are producing at the point on the PPF that we prefer above all other points

The point of allocative efficiency is the point on the PPF at which marginal benefit equals marginal cost.

This point is determined by the quantity at which the marginal benefit curve intersects the marginal cost curve.

Your task is to give a consultation to a factory that produces pizzas and CDs to determine which point of A, B, or C that is the factory should choose

to allocate efficiency ?To make report you must make

three step

1 -introduction

2 -discussion

3 -conclusion

First :introductionWhen we cannot produce more of any one good without giving up some other good that we value more highly, we have achieved allocative efficiency, and we are producing at the point on the PPF that we prefer above all other points. so We analyses all three point & then make decision

Second: Discussion

Option 1 ( point A ) Option2(point B ) Option3 (point C)

the factory produce 1.5 million pizzas. And we note the marginal cost of pizzas is 2CDs.and the marginal benefit from pizzas is 4CDs . Because someone values an additional pizza more highly than it costs to produce , we can get more value from our resources by moving some of them out of producing pizzas and into producing CDs

in this point the factor can produce 2.5 million pizzas and 10 million CDs. We show marginal cost (MC)&marginal benefit (MB) is equal at 3 CDs

MC = MB

the factor can produce 3.5 millions pizzas , the marginal cost of a pizzas is 4 CDs, but the marginal benefit from a pizza is only 2 CDs. Because the additional pizza costs more to produce than anyone thinks , we can get more value from from our resources by moving some of them out of of production pizzas & CDs

Third conclusion ( making decision )

According to above discussion ,we suggest option 2 ( point B ) because MC= MB =3

So this allocation of resources is efficient . If more pizzas are produced ,the forgone CDs are worth more than the additional pizzas, if fewer pizzas are produced the forgone pizzas are worth more than the additional CDs