Central Economic Problem Flashcards
Describe scarcity
The situation of limited resources in relation to unlimited wants
Describe resources
Inputs used in production of things we want, ‘factors of production’ are used interchangeably.
What are the four factors of production
Land - Natural resources
Labour - Mental and physical human effort
Capital - Man-made factors
Entrepreneurship - FOP that assumes risk and faces uncertainty of combining other three resources and engaging in production
Describe goods
All things from which individuals derive satisfaction
(Economic goods are subset –> scarce good)
Describe services
Tasks performed for someone else
Describe unlimited wants - insatiability of wants
Humans will always rather have more time, goods, services, money etc. New wants are always created as individuals desire to consume more of same good or other goods. Individuals constrained by budget/income, government constrained by tax revenue and accumulated reserves, society constrained by amount of resources.
Why is scarcity a relative concept
It exists because the world and every individual in it has limited resources in relation to wants and needs we have
What are three fundamental questions of resource allocation?
What (and how much) to produce?
How to produce?
For whom to produce?
Describe opportunity cost
Opportunity cost of any activity is the value of the next-best alternative (is relative person to person)
How to best satisfy all human wants
- Utilise existing resources efficiently to produce maximum amount of output possible
- Increase quantity and quality of resources and improve technology to expand productive capacity
- Specialise and trade to expand consumption possibilities beyond what we can produce
- Cut down wants
Define the production possibility curve
A graph that shows the maximum possible output combinations that economy can produce within a given period of time. It is a boundary because it shows the maximum production possible
Assumptions of production possibility curve
Two goods
Resources are fully and efficiently used
Quantity and quality of resources remain fixed, technology remains constant
How is scarcity represented by PPC
Only combinations of goods within and on PPC are attainable, beyond PPC are unattainable due to limited resources
How are points on, inside and outside of PPC illustrated by scarcity
Points on PPC can only be reached when resources fully utilised and there is productive efficiency. Within PPC means underutilisation and productive inefficiency. Points outside PPC are unattainable with economy’s given resources and technology
How is choice illustrated by PPC
Illustrated by the choice between different points on the PPC depending on economy’s relative preference for the two goods
How is opportunity cost illustrated by PPC
Trade-off between two goods and computed as slope of PPC
Why is PPC drawn concave to origin
Law of increasing relative cost states when society takes more resources and applies them to production of any specific good, opportunity cost increases for each additional unit produced. This law operates because certain resources are better suited for producing some goods than they are for other goods
