Used to visualise the opportunity cost of producing one good/service over another. BEP is best demonstrated with a PPF. There are three main assumptions;
Resources are fixed
Technology is fixed
Economy produces only 2 goods
Each axis are goods
Bowed out curve (realistic)
Straight curve (constant opportunity cost)
Inside curve - inefficient points
Outside - unattainable points
On curve - efficient and attainable
Curve can shift if technology or resources change
Characteristics of a Market Economy
Solves the BEP in a network of seperate but interconnected markets
Markets have;
Buyers (create demand)
Sellers (create supply)
A commodity (that is bought or sold)
Voluntary exchange (between buyers and sellers)
A process, mechanics or arrangement through which buyers and sellers 'meet'
Price (dependant on strength of demand and supply)
Two types;
Product markets:
Demand is created by consumers or households
Deal in the buying and selling of goods and services
Supply is created by producers and firms
Factor markets:
Deal in the buying and selling of factors of production (Land, Labour, Capital, Enterprise)
Demand created by firms
Supply created by households
Key features of a market economy
Property rights and private ownership
Economic freedom (able to choose one's own participation in the economy)
Self-interest
Competition
Moral Hazards (there are consequences of poor decision making)