lesson proper

1. To understand fully the lesson for today, read silently the material.
A. THE CENTRAL CONCEPT OF ECONOMICS
In module 1, we studied the definition of economics and the related words to the key terms used and its
definition. We also emphasized in Module 1 that there seems to be an irony in this very definition. There
seems to be disparity between scare or limited resources against unlimited human wants and needs. We
have to ask ourselves the questions;
 How do we reconcile something limited against something unlimited?
 How do we make do with something finite against something infinite?
These simple question emphasize that the central concept of microeconomics is summarized in one simple
word: SCARCITY.
SCARCITY
 It requires a great need for economics to be studied by everyone. The choices we want to make on
the use of our scare resources largely determine what needs and wants we would be satisfying and
how much satisfaction would we get.
Question
Let us consider the table below to better understand this concept of a growing human population.
LESSON PROPER
Let’s Begin!
Although the world may still be able to sustain our current needs and wants , what happens when we add
another billion people the current world population in, say, 15 years? Where will we get the resources
necessary to comfortably sustain the lifestyle, needs and wants of this additional one billion consumers? What
happens if we add another two billion people in next 30 years?

2. HUMAN POPULATION THROUGH HISTORY
(1 A.D to 2020)
Approximate Time Period Approximate Human Population
at this Time
Approximate Number of People
Added to the Population from the
Last Time Period
1 A.D. 150 million ---
1350 300 million 150 Million
1700 600 million 300 Million
1800 900 million 600 Million
1900 1.6 Billion 700 Million
1950 2.4 Billion 800 Million
1985 5 Billion 2.6 Billion
2020 8 Billion 3 Billion
** source: John H. Tanton, “End of the Migration Epoch” reprinted in The Social Contract, Vol. IV , No 3 and Vol. V No 1, 1995.
This table clearly indicates and simplifies the problem facing all of us today, that of an exponentially
growing world population, in a single living and livable planet. The question remains: Where do we get the
resources to sustain all these people?
The reality of the matter is that population keeps growing as do human wants and needs, and yet,
resources remain limited. How then do we reconcile something limited with something unlimited? Consider
the simple diagram below to better appreciate scarcity.
Wants
& Needs
In
1 A.D.
Wants
& Needs
In
1985
Wants
& Needs
In
2050
Wants
& Needs
In
20XX
Wants
& Needs
In
20XX
- Suppose that this square represents all resources that planet Earth can offer.
-Suppose that these rectangle represent the amount of resources being demanded by people in the
planet in a given period of time.
 This diagram may not be in realistic, but it points out the fact that resources are scarce, and that
needs and wants continue to grow (even if population should stop growing, as in some countries).
There is only a limited amount of resources that could be offered at this time, while human wants
and needs continue to grow.

3.  It is the proper allocation of these scarce resources to satisfy the ever growing needs and wants of
man that makes the study of microeconomics so interesting and challenging at the same time.
B. PRODUCTION POSSIBILITIES CURVE AND FRONTIER
PRODUCTION POSSIBILITIES CURVE (PPC)
 It is a graph, which depicts the concept of opportunity cost by showing production tradeoffs
between two goods in hypothetical economy. The combination of these production possibilities,
when written down on a table, is called a Production Possibilities Schedule. To establish the use
of this simple economic model, the following assumptions are made:
1. The economy is working at maximum efficiency.
2. There are only two goods being produced in the economy.
3. The same resources are being used in the production of these two goods and may be shifted to
produce more of one good, or more of another.
4. Resources and technology are fixed.
Efficiency here would mean the amount of input needed to produce an output. The more efficient an
economy is, the less inputs are needed to produce the same level, if not a higher level of output.
Allocative efficiency is attained when firms produce those goods and services most valued or most
demanded by society. This means scarce resource are allocated to the production of the goods and
services so that consumer wants and needs are met in the best way possible.
Productive efficiency may be attained when an economy uses the least amount of resources to produce
at the lowest possible unit cost.
Productivity is simply defined as the amount of output per unit of a given input.
Sample:
For example, say an economy can produce 20,000 oranges and 120,000 apples. On the chart, that's point B. If it wants
to produce more oranges, it must produce fewer apples. On the chart, Point C shows that if it produces 45,000 oranges,
it can only produce 85,000 apples.
By describing this trade-off, the curve demonstrates the concept of opportunity cost. Making more of one good will cost
society the opportunity of making more of the other good.

4. What the Shape of the Curve Tells You?
 The production possibility curve bows outward. The highest point on the curve is when you only
produce one good, on the y-axis, and zero of the other, on the x-axis. On the chart, that is Point A.
The economy produces 140,000 apples and zero oranges.
 The widest point is when you produce none of the good on the y-axis, producing as much as possible
of the good on the x-axis. On the chart, that is point D. The society produces zero apples and 40,000
oranges.
 All the points in between are a trade-off of some combination of the two goods. An economy operates
more efficiently by producing that mix. The reason is that every resource is better suited to producing
one good than another. Some land is better suited for apples, while other land is best for oranges.
Society does best when it directs the production of each resource toward its specialty. The more
specialized the resources, the more bowed out the production possibility curve.
PRODUCTION POSSIBILITIES FRONTIER (PPF)
 As stated earlier encompasses all production possibilities in a given economy.
 This means that all points in the graph, below on and above the PPC should be consider in the PPF.
 This is why it is called frontier – up to where production is possible, even if extraordinary done.
Note to given example:
 The production possibility curve portrays the cost of society’s choice between two different goods.
An economy that operates at frontier has the highest standard of living it can achieve, as it is
producing as much as it can using the same resources. If the amount produced inside the curve,
then all of the resources are not being used. On the chart that is Point E.
Marginal Rate of Transformation is simply the slope of the production possibilities curve at any given
point in the PPC. It describes numerically the rate at which one good can be transformed into the other.
Marginal Opportunity Cost of a commodity- that is it is the opportunity cost pf one good in terms of the
other good at the margin.