This document provides an overview of principles of economics taught by Professor Michael Noel at the University of Mindanao. It defines key economic concepts like scarcity, opportunity cost, and production possibility frontier (PPF). The PPF illustrates the tradeoffs between producing different goods that arise from limited or scarce resources. A downward sloping or concave PPF shows increasing opportunity costs as more is produced of one good and less of another. Changes in available resources can cause the PPF to shift left, right, up or down.

1. PRINCIPLES OF ECONOMICS
2012
Professor Michael Noel
Prof of College of Business Administration Education
University of Mindanao

2. Topics
1. Definition of Economics
2. Economic problems
3. Production Possibility Frontier
4. Opportunity cost

3. Economics:
The study of the allocation
of scarce resources.
The Economic Problem:
How do we use scarce resources to best
satisfy unlimited human wants?

4. EXAMPLES OF SOME DECISIONS
ECONOMISTS HAVE ANALYZED
• Whether to buy a cell phone this week.
• Whether to have pizza for dinner tonight, or
something else.
• Whether to marry your sweetheart.
• How hard to study for this course.
• Whether to go to college, and if so, which one.
• Whether to buy a lottery ticket in the Mindanao
• lottery.

5. How can you apply economics in :
• Yourself
• To your future career

6. Factors in decision making
1. People face tradeoffs.
2. Opportunity cost.
3. Making decisions at the margin.
4. People respond to incentives.

7. How individual decisions affect others
1. Trade (exchange) can benefit everyone.
2. Markets are often a good way to organize
exchange.
3. Government can sometimes improve on
markets.

8. To say that a good is scarce means that
less of the good is freely available than
consumers would like.
examples of scarce goods:
rice, gulay, clean water, parks

9. Economic problems are divided
into:
• Macroeconomic
• Microeconomics

10. Macroeconomics: analysis of the economy
as a whole.
Factors affecting macroeconomics output
(GDP or GNP)
a. consumption expenditure
b. Investment expenditure
c. Government expenditure
d. Balance of payment

11. Microeconomics: analysis of the behavior of
individual decision-making units, such as
individual households or businesses.
Factors affecting microeconomics output
(goods and services)
a. Labor
b.Capital
c. Land
d.Entrepreneur
e.technology

12. positive economics:
what is or will be
normative economics:
what ought to be

13. ceteris paribus:
other things constant

14. Opportunity Cost:
the next best alternative that you had to give up
because you chose a particular option.
ex: The opportunity cost of going to a
basketball game may be the five or ten
extra points that you might have earned on
an exam by staying home and studying that
night.

15. Type of opportunity cost
• Constant opportunity cost
• Increasing opportunity cost
• Decreasing opportunity cost

16. In constant opportunity cost, the
PPF is
soft drink
burger

17. In increasing opportunity cost, the
PPF is
Soft drink
burger

18. In decreasing opportunity cost, the
PPF is
Soft drink
burger

19. Production Possibilities Frontier
or Production Possibilities Curve
(PPF or PPC):
a curve that outlines all possible combinations of
total output that could be produced assuming
• fixed resources
• full and efficient use of resources
• fixed technology

20. Example: Suppose you are currently taking just
two courses, Economics and History. Suppose
also that you have only 10 hours to study each
week.
If you used all your time for Economics, you
might get a 96 average in Economics, but a
48 in History.
If you used all your time for History, you
might get a 96 average in History, but a 48
in Economics.

21. If you studied some time for each, you might
have a 72 average in each course, or perhaps
a 60 in one and a 84 in the other.
If you sketch these points on a graph and
connect the points, you have the following
picture.

22. History Grade
96
84
72
60
48 60 72 84 96 Economics Grade

23. Production Possibility
History Grade Frontier (PPF)
96 Notice the PPF is negatively sloped,
reflecting the tradeoff between your
History and Economics grades. You
84 can only do better in one course if
you do worse in the other.
72
60
48 60 72 84 96 Economics Grade

24. The Production Possibility Frontier shows the best
you can do in current circumstances.
• You have fixed resources.
your brain and your time
• You are making full and efficient use of those
resources.
You are not getting up to get a snack every five
minutes.
• You have fixed technology.
Your knowledge of study techniques is fixed.

25. Suppose your circumstances change.
Perhaps
you quit your job, so you now have more
time for studying.
Before, the only way you could get an A in
Economics is if you flunked History.
Now with the extra time, you can get an A in
Economics and still have enough time to get
a D in History.

26. History Grade
96 Production Possibility
Frontier (PPF)
84
72
60
48 60 72 84 96 Economics Grade

27. Your new production possibilities frontier is
higher and further to the right than your
old PPF.

28. Suppose now that you are a country producing
food and clothing. Your options include the
following:
option food clothing
A 11 4
B 10 5
C 8 6
D 5 7

29. As you move from one option to another,
how much food must you give up to produce
another unit of clothing?
This amount is the slope of the production
possibility frontier.
slope = ( ∆Food / ∆Clothing)

30. |slope|
option Food Clothing | ∆F/∆C |
A 11 4
1
B 10 5
C 8 6
D 5 7
As the amount of clothing increases and the
amount of food decreases, the amount of food
that you have to give up in order to get another
unit of clothing increases.

31. Why?
When you are producing a lot of clothing and
not much food, you have only a few
resources used to produce food.
These are the ones that are much better at
making food than at making clothing.
If you move those resources from food to
clothing production, you will give up a lot of
food for only a little clothing.

32. food
Production Possibility
11
Frontier (PPF)
10
8
5
0 4 5 6 7 clothing

33. The concave shape reflects the changing
slope we just described.
We see this shape when resources are not
equally good at producing the different
commodities.
Since productivity differences seem
reasonable, we will usually draw our PPFs
with the concave (rather than straight-line)
shape.

34. Production Possibility Frontier (PPF)
food
Points below the PPF
represent unemployment
or inefficient use of
resources.
X
clothing

35. Production Possibility Frontier (PPF)
food
Points above the PPF
represent unattainable
combinations.
Y
clothing

36. Production Possibility Frontier (PPF)
If economic growth
food occurs, so that it becomes
possible to produce more
output, the PPF shifts to
the right and up.
clothing

37. Production Possibility Frontier (PPF)
food If, for some reason, there
is a reduction in resources
available for production,
the PPF shifts to the left
and down.
clothing