1.3 - Understanding the world by use of models

Question 1

All resources must be fully employed

Answer 1

This means that all resources are being fully used. If there were unemployment of some resources, in which case they would be sitting unused. The economy would not be producing the maximum it can produce.

Question 2

All resources be used efficiently

Answer 2

Efficiency in production means that output Is produced by use of the fewest possible resources; alternatively we can say that output is produced at the lowest possible cost.

If output were not produced using the fewest possible resources means it was produced at lowest possible cost. If output were not produced using the fewest possible resources, the economy would be wasting some resources.

Question 3

The production possibility curve

Answer 3

Represents all combinations of the maximum amounts of two goods that can be produced by an economy, given its resources and technology when there is full employment of resources and efficiency in production. All points on the curve are known as production possibilities.

Question 4

PPC –> DIAGRAM INFO

Answer 4

An economy’s actual output, or the quantity of output actually produced, is always at a point inside the PPC, because in the real world all economies have some unemployment of resources and some inefficiency in production. The greater the unemployment or the inefficiency, the further away is the point of production from the PPC.

Question 5

PPC - Scarcity, particular combination of goods will be produced, choices involve opportunity costs

Answer 5

Scarcity:
Because of scarcity the economy cannot produce outside its PPC.
With its fixed quantity and quality of resources and tech, the economy cannot move to any point outside the PPC, such as point G because it does not have enough resources.

Particular combination of goods will be produced:
Because of scarcity, the economy must make a choice about what particular combination of goods will be produced. Assuming it could achieve full employment and efficiency, it must decide at which particular point on the PPC it should produce.

Because of scarcity, choices involve opportunity costs:
If the economy were at any point on the curve it would be impossible to increase the quantity produced of one good without decreasing the quantity of other good. In other words, if production of one increases the production of other decreases - this sacrifice is called opportunity cost.

Question 6

What different points symbolise?

Answer 6

Note that opportunity cost arises when the economy is on the PPC (or more realistically somewhere close to PPC). If the economy is at a point inside the curve it can increase the production of both goods with no sacrifice, hence no opportunity cost, simply by making better use of it’s good: less unemployment and more efficiency.

Question 7

Economic Growth through PPC

Answer 7

Economic growth refers to increases in the quantity of output produced in an economy over a period of time.

Any economy is most likely to be associated at some point inside the PPC, as it is very difficult for an economy ever to be fully efficient and have the max employment of all resources.

The further away an economy is situated from its PPC, the greater its resource unemployment and inefficiency.

REDUCTION IN UNEMPLOYMENT AND INCREASES IN EFFICIENCY ARE 2 FACTORS THAT CAN CAUSE GROWTH OF AN ACTUAL OUTPUT.

The movement from point A to point B is actual growth.

Question 8

Outward Shift of PPC

Answer 8

Reduction of unemployment and inefficiencies can only result in a limited amount of economic growth. As the economy moves to closer to its PPC, the ability to achieve more growth is exhausted, ad more growth can only occur if there is growth in production possibilities, leads to outward shift of PPC.

FACTORS OF OUTWARD SHIFTS:
- Increases in the quantity of resources (factors of production) in the economy.
- Improvements in the quality of resources (for example, through more educated labour)
- Technological improvements

Question 9

Actual growth & Growth in production possibilities

Answer 9

Caused by reduction in unemployment and increases in efficiency in production.
Growth in production possibilities is caused by increases in quantity of resources and technological improvements.