Central Economic Problem Flashcards
Define Production Possibility Curve
It shows the maximum alternative combinations of two goods which the economy can produce within a specified time period, when a given quality and quantity of resources are fully and efficiently employed, at a given state of technology.
How does PPC illustrate choice?
As resources are limited, economy cannot be producing more than 1 combination of goods at the same so the economy has to choose a specific combination of goods to produce.
How does PPC show scarcity?
Economy cannot produce outside of PPC if quantity and quality of resources are fixed at a given state of technology, showing scarcity. Limited resources means that it is constrained to producing on points within the PPC.
Why is PPC downward sloping?
It slopes downwards because one good must be given up to obtain more of another good, illustrating opportunity cost. It also shows resources are limited.
Why is PPC concave in shape?
As resources are not homogenous and hence perfectly transferable from one use to another hence showing increasing opportunity cost.
What will be the shape of PPC if resources are perfectly suitable in the production of both goods?
The opportunity cost will be constant thus shape of PPC will be downward sloping straight line.
Define Unemployment
It is the situation whereby all available resources are not used to produce goods and services.
Define Underemployment
It is the situation whereby resources are utilised in production of goods and services but are operating below their potential capacity.
Define Productive efficiency
It is when firms produce at the level of output with the lowest possible average cost.
Define Allocative efficiency
It is the level of output whereby society’s welfare is maximised.
Define Dynamic efficiency
It is when Research and Development is done to meet society’s needs in the long run , it is done to maximise long run welfare.
What are capital and consumption goods?
Capital goods are goods that are used to produce other goods while consumption goods are goods that are consumed to yield satisfaction.
What is actual growth?
Actual growth is growth in actual output. This means that the economy is utilising previously unemployed resources or its making more efficient use of the employed resources.
What is potential growth?
Potential growth is the increase in potential output or the increase in economy’s capacity to produce more goods. It is due to increase in quantity of resources, increase in quality of resources or increase in state of technology.
