Basic Concepts (Topic 1) Flashcards
3 fundamental economic questions on choice
What to produce?
-This choice looks at the types of goods and services to produce as well as the quantity
How to produce?
-This choice looks at the method that should be used to produce the goods
For whom shall the goods be produced?
Who gets the goods and services produced depends on the incomes that people earn
Land earns : Rent
Labour earns: Wages
Capital earns: Interest
Entrepreneurship earns: Profit
Opportunity cost
Value of the best alternative sacrificed for a chosen alternative
Production Possibility Curve
Maximum combinations of two outputs an economy can produce in a given period of time with its available resources and technology
Assumes that
1) the amount of resources is fixed, but resources are equally suitable at producing both goods (consumer and capital goods)
2) resources are fully employed
3) Technology is fixed
Why can we only produce combinations within the PPC
Unable to produce beyond the PPC given the current amount of resources and technology
PPC concept of choice
If we choose combination A, we cannot have B, C, D…
Movement from one point on the PPC to another
-shift right
Tells us how much ? We have to forgo if we want to have more pizzas, shows the concept of opportunity cost
-PPC can only shift right if technology improves or we have more resources
3 economic systems
1) Command economy
-Resources are mainly owned by the government
-Decisions are made entirely by the government
-(North Korea)
2) Market economies (capitalism)
-Resources are owned by individuals (privately owned)
-Decisions are made entirely by individuals and firms
-these decisions are made by looking at market prices
-this means producers will make what ppl are willing to pay for
3) Mixed economies
-some resources are owned by individuals and some by the government
-decisions are made by both the market and the government
-government’s role is mainly setting laws and rules, providing key services
