An Unexpected Application
1) that there is scarcity whenever we have to make a choice between different uses to which resources can be put;
2) that our limited resources and technology set a limit to how much of any good or service that we can produce, but we can still "trade off" one kind of good (food in the model) for another (gadgets in the model);
3) that we can increase the production of one good only by diverting resources from another good, so that we suffer an "opportunity cost," that is, the loss of the opportunity to enjoy the other good.
These things have been expressed in terms of symbols -- tables of numbers and pictures -- and the same things could be expressed in equations programming commands. The model described a kind of interdependency (between production of food and of machinery) and something of the dynamics of the interdependency (that by producing more machinery, we can shift the production possibility frontier). In all these ways, it is a good example of a model, and one sort of thing that we will be trying to do as we continue in this Hypermedia text.
We understand that the allocation of resources is a social problem in any modern economy. Any modern economic system must somehow answer the questions posed by the allocation of resources.
If we are to understand the way in which people respond to this social problem, we have to make some assumptions about human behavior. The assumption at the basis of the neoclassical approach is that people are rational and (more of less) self-interested. This should be understood as an instance of positive economics (about what is) not normative economics (about what ought to be). This distinction, positive versus normative economics, is important in itself and is a key to understanding many aspects of economics.
