Central Problem of Economics

Question 1

define scarcity

Answer 1

the state of having limited resources which cannot meet unlimited wants

Question 2

what do rational stakeholders prioritise during decision-making?

Answer 2

consumer: net maximum utility
producers: max profit
govt/society: max societal welfare

Question 3

what is the marginalist principle?

Answer 3

marginalist principle states that rational stakeholders weigh marginal cost against marginal benefit and if MB>MC they continue to do the activity. If MC>MB they should do lesser of the activity and when MB = MC, they should stop doing that activity

Question 4

what are the constraints for various stakeholders?

Answer 4

consumers: income
producers: limited FOPs and funds
government: limited budget and/or resources

Question 5

define opportunity cost

Answer 5

Opportunity cost incurred is the net benefit derived from the next best alternative forgone.

Question 6

define production possibility curve

(include the asumptions made about the curve)

Answer 6

a PPC shows the combinations of the maximum amount of two goods that an economy can produce within a certain time period, with a fixed level of technology and all available resources are fully and efficiently employed

Question 7

What are the factors of production (FOPs) and its factor payments?

Answer 7

Capital (machinery): interest
Entrpreneurs: profit
Labour: wage
Land: rent

Question 8

What are the features of a PPC?

diagram + characteristic

Answer 8

1. point beyond PPC: unattainable combination (due to limited resources)
2. choice: two different points
3. opportunity cost: downward slope of the graph (illustrate using two points)
4. productive efficiency: any point on the PPC (inside the PPC is inefficient)
5. allocative efficiency: combination of goods that show society’s welfare (not on grraph)

Question 9

Contrast between a shift of the PPC versus a shift of a point on the PPC

Answer 9

• A shift of PPC outwards: productive capacity increases (Yf increase)
• A shift of point from inside PPC to on PPC: more goods are produced (actual growth)
• from one point on the PPC to another point on the PPC: choice

Question 10

What factors cause a shift in the PPC?

Answer 10

1. More FOPs available
2. quality of FOPs increase (level of technology improves)