1. BASIC ECONOMIC PROBLEM & RESOURCE ALLOCATION Flashcards
Fundamental economic problem
Scarcity, unlimited wants, limited resources
Opportunity cost
Next best alternative foregone when making an economic decision
3 main basic economic questions
What to produce
For whom to produce
How to produce
Positive statements
Based on scientific/ factual evidence
No valued judgement involved
Normative statements
Not based on scientific/ factual evidence
Subjective & valued judgement involved
Short run
A period during which at least one factor of production is fixed, cannot increase some FOPs in such short time (e.g construction of new building, investments on machinery= fixed, but labour, can always hire more)
Long run
A period during which all factors of production can be adjusted
Very long run
A period during which all inputs, technology & societal preferences can change
Human capital
Intangible
Skill/ expertise gained through training
Physical capital
Tangible
Machinery/ tools used to aid production
Specialisation
Focusing on the production at a specific good where they have an advantage over others
Advantages of specialisation
Increased expertise increased quality
Increased efficiency/ productivity
Effective resource allocation
Disadvantages of specialisation
Limited skill diversity, occupational immobility, may lead to unemployment
Structured unemployment
Tedious boredom
Decreased quality, decrease productivity
Market economy characteristics
No gov intervention involved
Allocation of resources purely done through market forces of demand & supply
Advantages of market economy
Efficiency, efficient allocation of resources, as purely done through demand & supply
Optimum production, reduce waste
Increased consumer choice
Better quality & lower prices as private firms compete
Disadvantages of market economy
Income inequality
- successful individuals = wealthy
- increased inequality gap
Lack of public goods as private firms aim is profit
Negative externalities as gov not involved.
Planned economy characteristics
Gov controls how, what, and for whom to produce
Advantages of planned economy
Decreased inequality due to
- gov regulations (e.g progressive tax)
- aims to redistribute wealth
Provision of public goods
Priority to essential services
Mixed economy characteristics
Both market forces & gov intervention involved
Both public & private sectors
Disadvantages of planned economy
Lack of innovation/ incentive, no profit incentives
Lack of consumer choice as all determined by gov on what to produce
No profit/ competition incentives, decrease productivity & efficiency- lower economic growth
Advantages of mixed economy
Address income inequality through help of gov
More provision of public goods
Redistribution of income through
- progressive tax
- welfare initiatives
Disadvantages of mixed economy
Lacks clear direction as market forces & gov intervention clashes, tension between the two
Complexity & more challenging in decision making, market forces & gov intervention slows down responsiveness to consumer demand
PPC movement
Occurs when more of one good is produced only by giving up production of another
PPC outward shift
Economic growth- increased production capacity
Increased GDP
Increase in living standards
