Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Microeconomics > Allocation of resources > Flashcards

Allocation of resources Flashcards

1
Q

Define opportunity cost

A

next best alternative foregone

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What is a PPC

A

A curve showing the maximum combinations of goods and services that can be produced in a set period of time given available resources

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What are the 3 economic agents

A

government, firms and households

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What is a trade-off

A

foregoing one or more desirable outcomes in exchange for increasing or obtaining other desirable outcomes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

When do the economic agents experience opportunity cost

A

consumers - when deciding what to spend their income on

firms - deciding on production and foregoing profits for an alternative venture

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Analysis if PPC

A

Point A shows a NOG so a combination of consumer and capital goods can be increased without opportunity cost. Point B represents a maximum combination of producer and consumer goods; production of capital goods can not be increased without an opportunity cost of consumer goods. Point C shows a POG and it is impossible to achieve this combined level of consumer and capital goods with the current level of resources and technology in the economy

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is scarcity

A

finite resources for unlimited wants

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What is productive efficiency

A

Attained when a firm operates at minimum average total cost, choosing an appropriate combination of inputs (cost efficiency) and producing the maximum output possible from those inputs (technical efficiency)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What is economic growth

A

an expansion in the productive capacity of the economy

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

A point on a PPC is what type of efficient

A

productively efficient because all resources are being used to produce maximum output

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What do movements and shifts along the PPC show

A

Movement shows the reallocation of resources, a shift shows a change in the amount of resources

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What can cause an outward shift in the PPC

A

improved technology, improved quality/quantity of land, labour, capital and enterprise causing productive potential of the economy to increase

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Analysis of negative economic growth on a PPC curve

A

the maximum possible production of wheat has fallen, while the maximum possible production of cars has remained unaffected. This could be due to a natural disaster, such as a volcanic eruption, affecting a rural area with wheat production and without car production. This leads to PPC0 shifting left to PPC1 which shows negative economic growth as the productive potential of the economy has fallen.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Benefits to a PPC

A

can make better decisions by considering the opportunity cost of actions to ensure more efficient allocation of resources

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Problems with a PPC

A
  1. Alternatives are not known then opportunity cost cannot be calculated or considered.
  2. May be not enough information about alternatives and their costs.
  3. Some factors of production may be hard to switch to an alternative use - limiting the usefulness of considering opportunity cost
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What is resource allocation

A

the way in which a society’s productive assets are used amongst their alternative uses

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

How do the economic agents help with resource allocation

A

households - utility of purchase, which occupation to pursue and which firms to work for.
firms - decide what to produce, technology to use, number of workers needed etc…
government - decided on spending, taxes and laws

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Incentives for households

A

because of limited resources, households are incentivized to maximise satisfaction by consuming products that most increase utility relative to their price. Opportunity cost means that consumption of the next best alternative products is sacrificed. If prices fall households are incentivized to consume more, as this will increase utility

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Incentives for firms

A

due to the price mechanism, and competition, households’ purchase acts as a signal to firms, helping to inform their production. Furthermore, competition incentivises firms to reduce prices to increase sales to households to maximise profits.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Incentives for governments

A

government has many, often conflicting objectives. Primarily it raises revenue with taxes to spend on services for households while maximising GDP growth at a sustainable rate. The government’s incentive is to maximise the lifespan of the government by achieving its objectives

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Why are incentives effective

A
  1. If rational and seek to maximise their utility, the incentive is more effective at ensuring resources are allocated in accordance with achieving their objective.
  2. If more and high quality information is available then incentive is more effective
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Why are incentives not effective

A
  1. Irrational agents will not act in accordance with its best interests so are less effective.
  2. Little information may hider all economic agents in making decisions that maximise utility, making them unable to effectively act in accordance with their incentives
  3. Less competition means households may be forced to pay too high prices or unable to afford products that in a more competitive market could afford.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

How can incentives be useful

A
  1. Incetives help us to create a working model of the economic world
  2. We can judge how changes in policy can effect economic agents
24
Q

How are incentives not useful

A
  1. Rationality may be an unrealistic assumption

2. The model may be simplistic and fail to capture other factors and links that exist in reality

25
Q

What is a free market economy

A

market forces are allowed to guide the allocation of resources within a society

26
Q

What is capitalism

A

A system of production in which there is private ownership of productive resources, and individuals are free to pursue their objectives with minimal interference from government

27
Q

What is the invisible hand

A

term used by Adam Smith to describe the way in which resources are allocated in a market efficiently

28
Q

What is a market

A

a place where buyers and sellers meet

29
Q

Analysis of a free market economy

A

Buyers and sellers are free to exchange what they have for what they want. We assume that economic agents are rational, so consumers exchange their time as labour for a salary because they prefer the salary than the time. Firms choose to employ the worker because the value of the work done is greater than the cost of employment. Salaries act as an incentive to workers to exchange their time, to afford thing that increase utility. Profits act as an incentive for firms to employ workers to produce goods. Higher prices are stronger signals that act as stronger incentives for workers and firms to direct their resources towards. Lower prices are a stronger signal to consumers. Individual firms and households perusing their own self interest lead to a better outcome as their needs are being met.

30
Q

Advantages to a free market

A
  1. lower price have highest demand incentivising firms to lower cost and prices.
  2. Entrepreuners are incentivised with profit to take risks and innovate - better products that meet needs of consumers
  3. Innovation leads to new products, so increased choice so consumers can buy what best reflects their needs
31
Q

Disadvantages to a free market

A
  1. Inequality - different strengths and opportunities lead to different salaries
  2. unprofitable products are not made because there is no incentive to make them even if they are beneficial to society e.g. last line antibiotics
32
Q

What is a centrally planned economy

A

Decisions on resource allocation are guided by the state

33
Q

Planned economy analysis

A

Government make decisions about allocating resources without the price mechanism to provide any information. Leading to both under and over production, misallocating scarce resources and failing to maximise utility for households. Furthermore, state owned firms have no incentive to improve the quality of the goods and services that they produce. Instead firms are incentivized to find the easiest possible way of meeting their quotas; such as by producing poor quality products if the quality of said prodd.t is not measured.

34
Q

Advantages to a planned economy

A
  1. Equality - government can ensure that the basic needs of all households are met by organising sufficient production.
  2. Low unemployment as the government can provide everyone with a job and a salary
  3. Can prevent monopolies from abusing their power
35
Q

Disadvantages to a planned economy

A
  1. Poor and slow decision making due to lack of info from price mechanism
  2. No incentive to lower cost and take risks or innovate because they can not keep profits
  3. Low innovation leads to restricted choice - firms are told what to make
36
Q

Why is a centrally planned economy better than a free market

A
  1. The poorest in society have their basic needs met and a job provided - utility higher.
  2. Monopolies are structurally unable to abuse their dominance at the expense of households.
37
Q

Why is a free market economy better than a centrally planned economy

A
  1. Fre market provides firms and government information with price signals which guides production. Planned economy can not obtain such information so there is poorer allocation of resources
  2. Competition imposes discipline upon firms to lower costs, innovate and take risks leading to a better allocation of resources than a centrally planned economy where no such incentive exists
38
Q

What is a mixed economy

A

Resources are allocated partly through price signals and partly by the government

39
Q

Analysis of a mixed economy

A

It benefits from the advantages of a free market; the price mechanism acts to best allocate some resources, and the choice and lower prices afforded to households maximises utility. The free market is harnessed to best allocate resources in areas that the price mechanism aligns the profit motivation of firms with the utility motivation of households. Furthermore, the government can still increase equality by mandating the public sector to provide free high quality services that are affordable to many households, such as education and healthcare.

40
Q

Advantages to a mixed economy

A
  1. The profits made in the private sector can be taxed and used to pay for services provided in the public sector.
  2. By providing services to firms employees’ the private sector benefits from healthier and more educated workers, improving their productivity.
  3. lower costs, prices, entrepreneurship, choice, more equality
41
Q

Disadvantages to a mixed economy

A
  1. The free market may fail to efficiently allocate resources
  2. Government intervention may lead to a misallocation of resources
  3. inequality, unprofitable products not made, monopolies, poor decision making by government
42
Q

How is a larger private sector better for an economy

A

Assuming rationality, households and firms know best how to spend to maximise utility and profit. Therefore, if the government reduces the size of the public sector, it prevents crowding out of resources, and allows for the happiest population and the most profitable and productive businesses. This supports the public sector as the private sector will then pay more tax.

43
Q

How is a larger public sector better for an economy

A

Improving public services offered by the public sector, such as healthcare, education and the transport network, is investment that increases productivity of current workers, future workers and businesses. This increases the long-run economic growth potential of an economy.

44
Q

Objectives of households analysis

A

Consumers’ own personal preferences dictate whether their utility will be maximised by substituting free time for more work. This in turn depends on the marginal utility available for consuming more. Marginal utility diminishes as each extra unit of good is consumed (diminishing marginal utility). As more free time is consumed, the additional utility it provides diminishes, raising the relative value of income from working. Furthermore, consumers can decide whether to spend now or to save, invest and spend more later. The extent to which consumers save depends on their willingness to defer gaining utility. Depending on preferences, it may be rational for one consumer to spend, and equally rational for another consumer to save.

45
Q

How are households’ methods to achieve objectives rational

A
  1. Work and spend now - maximises utility as preferences are best reflected.
  2. Work and save, spend later - maximises utility as investing income will lead to greater return which will lead to more utility from increased consumption and free time
  3. Have free time - maximises utility because utility gained from rest and play is greater than utility that could have been gained from additional work.
46
Q

How are households’ methods to achieve objectives are irrational

A
  1. Work and spend now - fails to maximise utility because saving, would lead to greater consumption and therefore greater utility
  2. Work and save - fails to maximise utility because it assumes that in the future consumers will be in good health to enjoy their spending and investment value will increase.
  3. Have free time - fails to maximise utility because the amount of utility gained can not be known before organizing to have free time, the expected value may not be achieved.
47
Q

How can considering objectives be useful

A

Help us to build a picture of how they will respond to economic changes, and therefore what policy makers can do to improve their lives

48
Q

How can considering objectives not be useful

A

Our model makes unrealistic assumptions about the level of knowledge that consumer have about their own preferences, situation, and the options available to them. Any conclusions that we draw may therefore be incorrect.

49
Q

What is the firms and government’s objectives

A

firms - profit maximization

government - maximise household utility

50
Q

Objectives of firms analysis

A

Firms are owned by shareholders and ran by managers. Owners set the objectives for the managers which in the long run is to profit maximise. In the short run it may be more advantageous so naximise sales to gain market share, but a firm would usually chnage to profit maximisation in the longer time once it is achieved a certain level of growth. Furthermore profits earned can be reinvested to develop new technology and expand into new markets. In the short run all profits can be reinvested, but in the longer run a firm will return profits to shareholders, only retaining some for reinvestment. Shareholders want profits ultimately because they are householders that want to increase their income to maximise utility.

51
Q

Objectives of government to analysis

A

The government is run by politicians who are motivated by a sense of public duty - they want to improve the lives of their countrymen, and pursue policies that they think will best achieve this. While far from the only way, the simplest way to measure increases in utility is to measure increases in real GDP per capita - as this increases the government has a strong indication that households utility is increasing.

52
Q

Firms and governments objectives are good for households

A

1 - greed becomes positive. Profit maximisation as an objective aligns the behavior of firms with producing the goods and services that households have signaled they cost desire.
2 - macroeconomic data shows improvements. Stronger metrics of economic performance are measures of improving quality of life for households

53
Q

Firms and governments objectives may not be good for households

A

1 - firms are incentivised to grow and become a monopoly. If they do, they may exploit their market power at the expense of consumers welfare with higher prices and lower production.
2.If the market is working poorly then profit maximisation fails to achieve an efficient allocation of resources and government intervention may be required.
3 - if population is rising faster than GDP, quality of life may actually be falling. Full employment may hide falling incomes or under employment

54
Q

Why may a firms objectives be good for the economy

A

The extent to which profit maximisation is positive for other economic agents depends on how competitive the market is; a more competitive market ensures more choice, higher quality and lower prices for consumers

55
Q

Why may governments objectives harm the economy

A

Policies that help one macroeconomic objective may hinder the achievement of others - increasing economic growth and achieving full employment conflict with achieving low inflation; higher and more incomes can cause demand pull inflation increasing the price level.

Microeconomics (7 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions