CEP Flashcards
Scarcity
Limited resources and unlimited wants
Factors of production and their definition
- Capital (physical capital)
- Entrepreneurship (organisation of all other FOPs, person who takes overall responsibility for decision making)
- Land (all natural resources available)
- Labour (human capital)
Evaluate concept of opportunity cost
- Subjective (Next best alternative to individual is valued differently)
- Difficult to calculate value of opportunity:
a. actual value of forgone benefits
b.estimations of forgone benefits are arbitrarily projected
c. acquiring accurate information about alternatives is costly and time consuming)
Opportunity cost
Expected benefits from the next best alternative that is forgone when making decision
Marginalist principle
- All economic agents are rational: aim to maximise net benefits
- If MB>MC, rational to do more.
- If MC>MB, rational to not undertake it.
Marginal benefit (marginal utility/ marginal revenue/ marginal social benefit)
Additional benefit derived from undertaking additional unit of activity
Marginal cost (Marginal social cost)
Additional opportunity cost incurred when undertaking additional unit of an activity
Law of Diminishing Marginal Utility
As quantity of good consumed increases, marginal utility falls.
Law of diminishing marginal revenue
Increasing amounts of a variable FOP with a given amount of fixed factor will cause each extra unit of variable factor to produce less extra output than previous unit
PPC
Shows all maximum attainable combinations of two goods a country can produce within a specified time period with all resources fully and efficiently employed at a given state of technology
How PPC represents (a) scarcity (b) choice (c) opportunity cost
a. Country is able to produce only at one of the points on or within the PPC at a given point in time and cannot attain points outside boundaries of PPC.
b. Can choose to produce at only one point along the PPC
c. Negative gradient, if amount of capital goods produced increases, amount of consumer goods produced decreases (assuming country is already on PPC)
PPC is concave because
- Resources in an economy are not perfectly suited to production of both goods, have to start using resources less and less suitable for producing consumer goods
- Opp. cost of expanding output of consumer goods measured in terms of forgone units of capital goods increases
Economic Efficiency
- Allocative effiency (all available resources are fully and efficiently employed)
- Productive Efficiency (society produces and consumes combination of goods and services that maximises their welfare)
Economic Growth
- Actual economic growth (increase in real national output)
- Potential economic growth (increase in ability to produce goods and services/ productive capacity)
What causes economic growth
- Actual economic growth
-> Greater and more efficient use of existing resources - Potential economic growth
-> Change in quantity of resources
-> Change in quality of resources (Efficiency or productivity of resources)
-> Change in technology (Productivity of resources increased)