There are basically three types of decision makers in an economy and these are:

The house hold : A house hold consists of individuals living under one roof, taking or subjected to other people’s financial decisions. A house hold is assumed to:

• Take consistent decision i.e. households are rational and can make their decisions to achieve what they want.
• Own all factors of production which are hired out to firms so that the house hold earns income.
• Aim at maximising the satisfaction i.e. they aim at buying at the lowest price possible so as to max utility.

The firm. A firm is a unit under unified control and management which employs factors of production to produce goods and services for sale to the house hold, other firms or the central authorities. The firm is assumed to:

• Aim at profit maximisation through producing at the lowest cost possible and selling at the highest price possible. Profit maximisation is the major goal of firms.
• Make consistent decisions and are therefore treated as a yardstick in production.
• Employ all factors of production and pay the house hold for their use.

The central authority. These are economic agents that belong to or owe their existence to government. They include instructions like the civil service, central bank, police, judiciary etc. They are at times referred to as 25 governments. These however are not assumed to be consistent and conflict amongst them is frequent.

The production possibility frontier/ opportunity cost curve/ transformation curve

The production possibility frontier is a curve that shows all possible combinations of two commodities that can maximally be produced when all resources are fully and efficiently employed. It is a curve showing maximum production possibilities of two commodities given the resource to produce them.

As indicated on the chart above, points A, B and C represent the points at which production of Good A and Good B is most efficient. Point X demonstrates the point at which resources are not being used efficiently in the production of both goods; point Y demonstrates an output that is not attainable with the given inputs.

The production possibility frontier illustrates the following;

Scarcity and choice. Resources are scarce therefore one cannot produce beyond the production possibility frontier using fixed resources. Hence there is need to choose between the two and to answer questions what to produce and how much to produce.

Opportunity cost. This illustrated by a movement along the production possibility curve. For example from X to Y. To produce more of B you forego A. Therefore the opportunity cost of producing more B is A you forego.

Efficiency in production. Points on the curve X and Y show efficient utilisation of resources. Points inside the curve for example A show that the resources are not efficiently utilised. Points outside the curve for example B are un attainable using the available resources.

Economic growth. This is illustrated by a shift of the production possibility frontier outwards to the right. The production possibility frontier shifts outwards because of the following;

• Increase in the labour force
• Increase in works efficiency.
• Improvement in technology
• Discovery of new natural resources increase in capital inflow
• Improved entrepreneurial ability.

The dotted line shows an outward shift of the P.P.F thus making point C production possibility. Such a shift may be as a result of improved technology or improved efficiency of human capital or any other factor that enhances economic growth.