Central problems of econ Flashcards
What is economics?
Economics is the social science that deals with the allocation and creation of scarce resources.
What is scarcity?
Scarcity is when there are not enough resources to meet the needs of all economic agents
What does the PPF stand for?
The PPF means Production Possibility Frontier.
What is the purpose of the PPF?
It represents how efficiently an economy produces a combination of goods, therefore allocating its resources effectively.
State and explain the assumptions made when drawing the PPF
Two goods: the economy can only produce two goods at a time to show opportunity cost.
Fixed resources: The quantity of factors of production are fixed, making them remain constant.
Fixed technology: There is no technological advancements within the economy.
Efficient use of resources: All available resources are fully and efficiently used, with no waste.
How to find the gradient/slope (opportunity cost)
-AY/AX {(Yb-Ya) (Xb-Xa)}
OR
-Change in Good Y/ Change in good X
What could lead to economic growth?
-Expansion of human resources: An increase in the size of labour force will lead to an increase in the amount of factors of production that can contribute to the productive progress.
-Technological change: An advancement in technology will cause an increase in output of goods.
-Competition: Firms that produce similar goods will produce at maximum efficiency to try and out produce its rivals.
-Resource boom: If new resources are discovered within the economy there will be an increase in the factors of production, resulting in an increase output.
What does an outward shift in the PPF mean?
If there is an increase in resources (like labor or capital) or technological improvements, the PPF will shift outward, indicating that more of both goods can now be produced.
What does an inward shift in the PPF mean?
If resources decrease or there is a loss of technology, the PPF will shift inward, reducing the economy’s capacity to produce goods and services.
Explain what will occur if an economy decides to produce Good A more than Good B
If the economy chooses to produce more of Good A then it will have to reduce the production of Good B as resources like labor and machinery must be reallocated. The opportunity cost of Good B will be represented by the slope of the PPF.
What is pareto efficiency?
This is achieved when goods and services are produced in the quantities desired by society.
What causes a shift along the PPF?
Change in income
Preference and taste
Season
Price of substitute
Locations
Trends
What does returns mean in economics?
Returns refer to the relationship between the inputs (resources) used in production and the resulting output.
What is constant returns?
When constant returns to scale occur, increasing the amount of input (like labor or capital) by a certain percentage leads to an increase in output by the same percentage. In other words, output increases in direct proportion to the increase in inputs.
Example: If doubling the resources (e.g., labor and capital) leads to exactly double the output, then there are constant returns to scale.
What is diminishing returns?
Diminishing returns occur when each additional unit of input produces less additional output than the previous unit. This means that as more resources are added, the increase in output gets smaller.
Example: If a farm adds more workers to a fixed amount of land, at first output increases significantly, but as more workers are added, they may get in each other’s way, and output per worker decreases.
What is increasing returns?
Increasing returns occur when each additional unit of input results in a greater increase in output.
Example: A factory that invests in more machines or workers and experiences a significant increase in output due to better specialization or economies of scale.
