block 1 - economics, the economy, and tools of economic analysis

Question 1

how is the concept of scarcity the foundation of economics

Answer 1

it reflects the imbalance between our unlimited human wants and the limited means (land, capital, labour, entrepreneurial talent)

every choice involves a cost (opportunity cost)

Question 2

what is opportunity cost

Answer 2

the value of the next best alternative foregone

Question 3

what does the productive possibility frontier show

Answer 3

shows the maximum combinations of output that the economy can produce using all the available resources

oso shows trade off where more of one commonality implies less of the other

Question 4

how does the PPF show productive efficiency

Answer 4

it is impossible to produce more of one good without reducing the output of another good
- every point on the PPF has an opportunity cost

Question 5

what does it mean when there is productive inefficiency

Answer 5

can produce more of one good without having to give up some of the other good
- combinations inside the PPF have no opportunity cost

Question 6

what is allocative efficiency

Answer 6

a productive efficient combinations that society desires
- one that maximises society welfare

Question 7

why is the PPF concave to the origin

Answer 7

resources are not equally suitable in the production of all goods

diminishing marginal returns to a FOP
- as more of one input is added to the production of a certain good (while the other remains fixed), the output added by those additional resources decreases

Question 8

what does the theory of absolute and comparative advantage and specialisation explain

Answer 8

1. trade arises because of differences in opportunity costs of producing goods
2. trade can be mutually beneficial and increases the amount of goods available

Question 9

when does a country/ individual have absolute advantage in a good

Answer 9

1. it can produce more of a good with the same amount of resources
2. can produce the same quantity of goods using less inputs

Question 10

what happens when each individual has comparative advantage in a good

Answer 10

there is a basis for trade

each will specialise in the goods it has comparative advantage in

specialisation in the good one has comparative advantage in increases output

both will gain from trade is terms of trade (price at which gods are traded) lie between their domestic opportunity cost