Production Possibilities

1. Macroeconomics vs. Microeconomics

Macroeconomics 
The study of major components of the economy
Ex) inflation, GDP, international trade

Microeconomics
Study of how households and firms make decisions and how the interact in markets.

2. Positive economics vs. Normative Economics

Positive economics
Claims that attempt to describe the world as is. Very descriptive
Ex) Minimum wage laws causes unemployment.

Normative economics
Claims that attempt to prescribe how the world should be. Very prescriptive in nature. Opinion based.
Ex) the government Should raise minimum wage.

3. Needs Vs. Wants

Needs
Basic requirements for survival

Wants
The desires of citizens. They are more broader than your needs.

Scarcity vs. Shortage

Scarcity
It is the most fundamental economic problem facing all societies. Saturating unlimited wants with limited resources.
Ex) Gold, oil

Shortage 
Where quantity demanded is greater than quantity supplied. Shortages are temporary whereas scarcity is a permanent problem.

4. Goods vs. Services

Goods
Tangible commodities
Consumer goods- goods that are intended for final use by the consumer.
Ex) chocolate candy bar, car

Capital goods
Items used in the creation of other goods
Ex) factory machinery and trucks

Services
Work that is performed for someone else

5. Factors of production

1) Land- natural resources
2) Labor- work force
3) Capital- 2 types
Human capital- knowledge and skills, what you gain from education and experience.
Physical capital- human made objects used to create other goods and services.
4) Entrepreneurship- you must be an innovator and a risk taker.

How do we use our resources effectively?

Trade offs 
Alternatives that we give up whenever we choose one course of action over another.
Ex) we choose as students to either go to school or stay in bed. Should I study or should I hang out with friends?

Opportunity cost 
It is the most desirable alternative given up by making a decision.

Production possibilities graph
Shows alternative ways to use resources

The line represents the PPC, Production Possibility Curve, or also known as the PPF, Production Possibilities Frontier. Each point shows a trade off.

In this example we are able to see that:

Point A- This point represents under-utilization.
               It is attainable but inefficient.
               To get to this point, you can have a decrease in population, a recession, war and famine, and either underemployment or unemployment.

Point B- This point is considered efficient but more guns are produced that than butter.

Point C- This point is considered efficient but more butter is produced than guns.

Point D- This point is efficient, and both guns and butter are produced equally.

Point X- This point is on the outside of the curve and is considered unattainable. This point in production can be caused by an economic growth, technology, or new resources.


Productive efficiency
Producing at the lowest cost, allocating resources efficiently, and having full employment of resources. Any point on the curve.

Allocative efficiency 
Looking at where to produce on the curve. Looking for the best combination possible.