Theme 1: Introduction to markets

and market failure

In this theme, students will consider how markets work, looking at how supply and demand interact to allocate resources in local, national and international markets. They will learn how to apply supply and demand analysis to real-world situations and be able to offer explanations of consumer behaviour. This will involve looking at both how consumers act in a rational way to maximise utility and howfirms maximise profit, but also why consumers may not behave rationally.

1.1 Nature of economics

Subject content 1.1.4 Production possibility frontiers

What students need to learn:

a) The use of production possibility frontiers to depict:o the maximum productive potential of an economyo opportunity cost (through marginal analysis)o economic growth or declineo efficient or inefficient allocation of resourceso possible and unobtainable productionb) The distinction between movements along and shifts inproduction possibility curves, considering the possiblecauses for such changesc) The distinction between capital and consumer goods

Objectives

• To understand the reasons for shifts and movements on a PPF• To analyse the production possibility of an economy in

given scenarios using diagrams• To evaluate the impact of the production of capital

goods vs consumer goods

Log onto Showbie and complete worksheet allocated to the group.

3

Extension In the longer run, the number of resources used to make both types of goods increases in Country A. Combination B now becomes attainable and efficient. Draw another production possibility curve on Figure 2 and label it PPC2 to show this scenario.

Starter

70 units

80 units

7

8

Extension

What is going on here?

Capital vs Consumer Goods

How could a country promote growth? What could it invest in that would cause growth in the long term?Read through the article on Learning space and jot down ‘why capital investment matters’ in order to

explain why in the long run capital investment is better for growth.

Extension thought: What are the problems with investing heavily in capital goods? Think about trade-offs/ opportunity costs.

Extension activity: Can you draw a PPF for a country that has invested heavily in capital goods?

A

B

C D

Consumer Goods

Capital Goods

Which point do you think is the most efficient combination of resources to promote growth in an

economy? Why?

P

P

Q

Q

R

R

• What are the issues short term? What is the trade off?

Draw a PPF. The vertical axis shows the production of public sector goods and the horizontal axis shows production of private sector goods. The economy is currently producing at Point A on the frontier where 50% of all production is devoted to public sector goods and 50% to private sector goods.

a) Mark the following points on your drawing.i. Point Aii. Point B which shows production following the election of a government spending on both educations and

the NHS.iii. Point C where unemployment is present in the economyiv. Point D where the government takes over production of all goods and services in the economy.

b) Draw another diagram putting on it the original PPF you drew for (a), labelling it AA.v. Draw a new PPF on the diagram, labelling it PP, which shows the position after a devastating war hit the

economy.vi. Draw another PPF labelling it QQ which shows an increase in productivity in the economy such that

output from the same amount of resources increases by 50% in the public sector but twice that amount in the private sector.

Private vs Public Activity

Efficiency

Allocative efficiency occurs when social welfare is maximised. There could be just one point that does this.

Productive Efficiency Allocative efficiency

Productive efficiency can be defined as producing goods and services for the lowest cost. All points are on the boundary are productively efficient.

APPLICATION

APPLICATION

APPLICATION