Chapter 1:

Introduction to Economic Development

 Resources must be put to work to move
UNDERSTANDING SCARCITY back to production possibilities curve.

• There is always a limit to the use of ECONOMIC GROWTH

resources to produce what the society  A sustained increase in production,
wants. represented by an outward shift of
• There is a need to make a choice among production possibilities curve.
competing uses of resources.  Assumption in our illustration of
production possibilities: Resources and
Production Possibilities: technology are constant.
The easiest way to look at the problem of  Reality: Resources and technology do
societal choice. change. Our country should not be
• An economic concept that explains restricted to a single production
scarcity and the need to make a possibilities curve. Economy may grow
choice. to increase production output with the
• Alternate combinations of maximum available resources.
amounts of two different goods that
can be produced in a given period if Key Learnings from the Concept of Production
the economy’s resources are used Possibilities
fully and efficiently
 Nations must prioritize spending.
Assumptions is examining production  Costs of unemployment are not limited
possibilities: to personal hardships. Costs are borne
by the nation and the world in the form
1. Resources are used fully. of reduced production.
2. Resources are used efficiently.  If resources are wasted, production will
3. The quantity and quality of resources are be reduced.
not changing over a period of analysis.  Problem of scarcity is a big issue
4. Technology is not changing over the  Problem of scarcity: is a REAL issue.
period of analysis.
5. Only 2 goods can be produced with the Poverty is a situation in which one is
available resources and technology. unable to get even the minimum basic
necessities of life such as food, clothing and
Opportunity Cost shelter. A person is considered poor if he is not
• The best alternative forgone to produce able to fulfill his basic needs.
or consume something else; what you
give to get something else.
• ECONOMICS AND DISTRIBUTION
Unemployment
• A situation in which resources are not The reason there is hunger in a world of
fully used in production. plenty is not a problem of production but of
distribution. Poor people and poor governments
lack the income to purchase food that is
Assumption in our illustration of production produced.
possibilities: There’s full use of resources,
knowledge and technology What is the basis of distribution in a Free-market
economy?
 Reality: Some resources may not be
fully utilized, some even unused.  Demand and Supply= Prices
  Demand schedule - A table showing the  Changes in sellers’ expectations about
quantities that consume are willing to the product’s future prices.
buy at alternative prices during a
specified time period Equilibrium: State of balance, A point at which
 Demand Curve: Graph showing Quantity demanded equals quantity supplied,
quantities that consumers are willing to Shortage: A situation in which quantity
buy at alternative prices during a demanded is greater than quantity supplied.
specified time period.  Occurs only when the price is lower
 Law of demand: There is a negative than the market level.
relationship bet. price and quantity Surplus: A situation in which quantity supplied
demanded all other things equal. is greater than quantity demanded.
 Occurs when the price is higher than the
Factors that Cause Demand Curve to Shift market level.
EFFICIENCY - Using resources in such a way
• Changes in the number of consumers as to maximize the desired output.
who wish to purchase the product. EQUITY - Fairness.
• Changes in the tastes of the consumers
in the market. MARKET FAILURE
• Changes in the prices of complements or Situations when pursuit of profit will not result
substitutes. in increase in consumer satisfaction.
• Changes in consumers’ income.
• Changes in consumers’ expectations General Cases of Market Failure
about the product’s future prices or
availability.  Spillover - Cost or benefit of a private
market activity that is shifted onto
• Supply schedule- A table showing the society also called externality.
quantities that suppliers are willing to  Externalities
sell at alternative prices during a  Pollution
specified time period  Groundwater contamination
• Supply Curve: A graph showing the  Resource Depletion
quantities that suppliers are willing to  Soil Erosion
sell at alternative prices during a  Nuclear Waste disposal
specified period.  People downwind
• Law of Supply: There is a positive  Neighbors
Relationship between price and Quantity  Future Generations
supplied, all other things equal
Inequity, Market Power and Instability
Factors that Cause Supply Curve to Shift Causes of Inequity

 Changes in the number of sellers in the  Discrimination.

market.  Poverty.
 Changes in the prices of resources used  Inequality of income distribution.
to produce the product.
 Changes in the technology used to MARKET POWER - The ability of a supplier to
produce the product. influence the market price of its product.
 Changes in the prices of other products  Competition protects consumers from
that could be produced with the same unreasonable prices.
resources.  Pure competition discourages market
 Changes in government taxes or power because there are many producers
subsidies.
 selling a standardized product to many
buyers.

INSTABILITY
State of economic volatility
 The factors that determine whether our
nation is operating within the production
possibilities curve or below it is
dynamic.
 High and low employment affects
production possibilities, and changes in
average price levels
 There is economic instability when
employment and prices fluctuate.

Inflation- A rise in the average price level in the

economy.
Microeconomics- The study of individual areas
of activity within the total economy.
Macroeconomics- The study of the total
economy.
Gross Domestic Product (GDP)- Total output
within the economy.
Economic liberal (Economic left)- A person who
believes in high level of gov’t involvement in
the economy.
Economic Conservative- A person who believes
in very low levels of government involvement in
the economy.