Chapter 1 Flashcards
Relative Scarcity
Is called the fundamental economic problem. It arises as the planet and economies have limited resources yet we as humans have unlimited wants (cars, phones; not needed to survive) and needs (clothes, shelter, food; needed to survive).
Opportunity Cost
The Opportunity Cost is the value of the next best alternative forfeited when making an Economic decision.
Three Economic Questions
- What to Produce
- How to Produce
- For Whom to Produce
PPF - Production Possibility Frontier
To graph the possibilities of how a nation can use its scarce (limited) resources we can draw a Production Possibility Frontier (curve)
A PPF Illustrates the maximum Goods and Services that can be produced
What does it mean when a point is on the Curve of the PPF?
It means that all resources are used and units of output are maximised. This would be referred to as Technically Efficient.
What does it mean when a point is inside of the PPF Curve?
This means resource allocation is inefficient as not all resources are used and output isn’t maximised. (Pareto Efficiency)
What does it mean when a point is outside of the PPF Curve?
This would be impossible as this would require more resources than currently possible.
Technical Efficiency
A type of efficiency where the unit of outputs are maximised with the available inputs (resources).
Allocative Efficiency
A type of efficiency where resources are allocated in a way that maximises the well-being and living standards of society.
Dynamic Efficiency
The speed at which an Economy can reallocate their resources from the production of one good or service, to the production of another good or service.
Inter-temporal Efficiency
Inter-temporal Efficiency focuses on balancing the use of resources for present needs as well as preserving resources for future generations.
Conditions of a Free Market
In a free market prices are subject to Demand and Supply, there’s limited government intervention and all resources are privately owned. Firms are driven by self-interest and profit.
Conditions of a Perfectly Competitive Market
- Large number of buyers and sellers (No one seller can alter the price on their own)
- Products are homogenous
- Resources are mobile
- Low or No Barriers to enter or to exit of the market.
- Buyers and sellers have perfect knowledge about the product sold.
Assumptions Economists Make
-1 - Businesses and Firms want to maximise their profit (Revenue - Expenses)
-2 - Consumers want to Maximise their well-being and satisfaction
-3 - We assume that markets are completely competitive
