Central Problem of Economics Flashcards
What is a positive statement?
A statement of fact, may be right or wrong but its accuracy can be verified by appealing to facts.
What is a normative statement?
A statement of value or opinion, about what ought to be or what ought not to be, good or bad, desirable or undesirable. It cannot be proved or disproved by appealing to facts and is subjective.
What is the basic problem of economics?
Scarcity, which arises from limited resources and unlimited wants.
What are the 4 resources/factors of production?
Capital, Entrepreneurship, Labour, Land.
What is capital?
It refers to physical capital, and are man-made resources such as machines, factories, transport etc.
What is entrepreneurship?
Performing the functions of organising and managing the other factors of production, innovating new products and ways of production and taking the risks of being in business, taking overall responsibility for the decision-making process in a firm so that other factors of production could be combined to provide a good or service.
What is land?
All the natural resources available, which could be renewable or non-renewable in nature.
What is labour?
Also known as human capital, refers to people, including their skills and abilities, consisting of those who are able and willing to work, employed and unemployed.
Scarcity implies that…
Choices have to be made by producers, consumers and governments.
What is opportunity cost?
The (expected) benefits from the next best alternative that is forgone when making a decision.
Opportunity costs may include both explicit costs and implicit costs of making a decision. Explicit costs are costs that require a direct money payment while implicit costs are costs that do not require a direct money payment. Instead, implicit costs are the value of anything other than the direct payment that is sacrificed (e.g. time) when a decision is made.
What are the characteristics of opportunity costs?
They are subjective, their values are difficult to calculate, and they vary with circumstances.
Why is opportunity cost subjective?
Only individuals making the choice can identify the most attractive alternative based on their individual preferences and needs, and quantify the value of the forgone benefits accordingly. As such, no two individuals are likely to value the forgone benefits equally.
Why is the value of opportunity cost difficult to calculate?
We seldom know the actual value of the forgone benefits because the next best alternative is “the road not taken”. it is always difficult to rank these preferences by assigning an exact value to each one of them.
Why does opportunity cost vary with circumstances?
Circumstances affect the valuation of the forgone benefits arising from not choosing the available alternative at the point of making the decision, as well as the choice made itself.
What is the assumption for all economic agents?
They are rational and aim to maximise their own benefits.
What is marginal benefit?
The additional benefit derived from undertaking an additional unit of an activity.
What is marginal cost?
The additional (opportunity) cost incurred when undertaking an additional unit of an activity.
What is the marginalist principle?
At any given unit of an activity, if the marginal benefit exceeds the marginal cost, it is rational for the economic agent to undertake the activity (or do more of it) because the agent would gain more benefit than cost through this action. If the marginal cost exceeds the marginal benefit, however, it is rational to not undertake it (or do less of it) because the agent would otherwise incur more cost than benefit.
Who are the economic agents?
Consumers, producers and governments.
What is the ABCDE decision-making approach?
Aim: Maximise net benefits based on problem, options and constraint faced by the economic agent.
Benefits: Both monetary and non-monetary, consider information and perspectives.
Cost: Both implicit and explicit, consider perspectives, information available and constraint arising from scarcity.
Decision-making: Use Marginalist Principle (Undertake more of the activity if MB > MC, stop when MB = MC, undertake less of the activity if MB < MC).
Evaluate: Decide whether to change decision, consider different scenarios.
ABCD’s of consumers:
Aim: Maximise utility
Benefits: Marginal benefit, aka marginal utility, additional satisfaction gained from consuming one extra unit of the good within a given period of time.
Costs and constraints: Marginal costs, limited income
Decision-making: Consume quantities of a good up to the point where MU ≥ price
What is the Law of Diminishing Marginal Utility?
As the quantity of a good consumed increases, the marginal utility falls. Up to a point, the more of a good consumed, the greater the total utility derived by the consumer. However, as the consumer becomes more satisfied, each additional unit of the good consumed will probably give less additional utility than previous units.
ABCD’s of producers;
Aim: Maximise profits.
Benefits: Marginal benefit, aka marginal revenue, additional revenue that a producer receives from selling the additional unit of the good.
Costs and constraints: Marginal cost, limited factors of production.
Decision-making: Produce quantities of a good up to the point where MR ≥ MC.
What is the Law of Diminishing Marginal Returns?
When increasing amounts of a variable factor of production are used with a given amount of a fixed factor, there will come a point when each extra unit of the variable factor will produce less extra output than the previous unit. Thus as the firm’s output rises beyond a certain threshold, its marginal cost of production would start to increase as factors of production become more inefficient.
