The subject matter of economics
Going from 60 to 80 thousand electronic units costs 40 thousand tonnes of food, and the cost of each additional unit rises from 1.5 to 2.7 tonnes: the resources that are moved are less and less suited to the new task.
01Scarcity and choice
Economics studies how societies use scarce resources to satisfy needs that have no limit. Since there is not enough for everything, we have to choose, and every choice has an opportunity cost: the value of the best alternative that is given up. An hour spent studying is an hour not worked; a plant that makes televisions does not make, with those machines, anything else. Every society answers three questions: what to produce and how much, how to produce it and for whom.
| Factor of production | What it is | Remuneration |
|---|---|---|
| Land (natural resources) | Soil, minerals, energy, water | Rent |
| Labor | The physical and intellectual effort of people | Wages |
| Capital | Produced goods that are used to produce: machines, buildings, instruments | Interest |
| Entrepreneurship | Organizing the other factors and taking on the risk | Profit |
02The production possibilities frontier
If an economy with given resources and technology produces only two goods, the production possibilities frontier gathers the maximum combinations it can reach. Interior points are inefficient —there are idle resources—; exterior ones are unattainable today. The slope is the opportunity cost, which grows as more of one good is produced because resources are not equally suited to everything: the frontier is concave. Economic growth, through more resources or better technology, shifts it outward.
An economy that produces electronic units (X) and food (Y), in thousands of units and of tonnes, with a maximum of 100 thousand units. The yellow dot is on the frontier; the red line is its slope, the opportunity cost. An improvement in food production shifts the frontier (blue) relative to the original one (gray).
03Agents, circular flow and systems
Economic agents are households, which offer factors and consume; firms, which demand factors and produce; the government, which collects taxes, provides public goods and regulates; and the external sector. In the circular flow, households sell factors to firms and buy goods from them, and money circulates in the opposite direction. Depending on who answers the three questions, a system is a market system, when prices and private agents decide them; planned, when the State decides them; or mixed, like all current economies.
Positive economics describes what is and can be tested against data; normative economics says what ought to be and includes value judgments. Microeconomics studies the decisions of agents and markets; macroeconomics, the aggregates: total output, employment, prices and foreign trade.
04In the laboratory
Calculate the opportunity cost of pursuing the degree: tuition, materials and the income given up.
Draw the circular flow including the government and the external sector, and place an Argentine electronics company in it.
Classify ten statements from economic news as positive or normative.
05Common mistakes
- Counting only monetary costs. Opportunity cost includes what you stop earning.
- Believing that opportunity cost is constant. It grows as production becomes specialized.
- Confusing an interior point with an unattainable one. An interior point is possible but wastes resources.
- Presenting an opinion as a fact. Positive and normative statements must be distinguished.
06Self-assessment
With the lab frontier, how much food can be produced along with 60 thousand units?
160 thousand tonnes.
What is the opportunity cost of one more unit there?
1.5 tonnes of food.
What does a point inside the frontier represent?
A possible but inefficient combination: there are idle or poorly used resources.
What is the remuneration of capital?
Interest.
07Further reading
- Paul A. Samuelson and William D. Nordhaus. Economics. McGraw-Hill. (Spanish edition: “Economía”.) The classic textbook, with the production possibilities frontier and opportunity cost.
- N. Gregory Mankiw. Principles of Economics. Cengage. (Spanish edition: “Principios de economía”.) The ten principles of economics, with clear examples.
- Francisco Mochón and Víctor Beker. Economía: principios y aplicaciones. McGraw-Hill. (In Spanish.) An introductory text with examples from the Argentine economy.