The economic problem and economic systems

Scarcity and choice

Resources (land, labour, capital, enterprise) are limited while wants are unlimited, so choices must be made. Opportunity cost is the next best alternative forgone.

The production possibility curve (PPC)

Shows the maximum combinations of two goods that can be produced with given resources and technology.

• Points on the curve are efficient; inside shows unemployment of resources; outside is unattainable.
• The curve is usually concave (bowed out) because of increasing opportunity cost.
• Economic growth shifts the curve outwards (more resources, better technology, education).

Economic systems

• Market economy: prices allocate resources; efficient and innovative but may cause inequality and market failure.
• Planned (command) economy: the state allocates; can reduce inequality but suffers from inefficiency and poor incentives.
• Mixed economy: both private and public sectors – most countries, including Zimbabwe.

Positive and normative statements

Positive statements can be tested with evidence (“inflation rose to 10%”); normative statements are value judgements (“the government should cut taxes”).

Check yourself

1. Define opportunity cost.
2. What does a point inside the PPC represent?
3. Is “the minimum wage should be raised” positive or normative?