Chapter 1: Scarcity as the central economic problem

Question 1

Define scarcity

Answer 1

Scarcity is defined as the excess of human wants over what can actually be produced.

Question 2

What resources are considered in the production process?

Answer 2

C - capital (man-made/ physical resources)
E - entrepreneurship (the willingness to take risks and mobilise FOPs for production. Also engages in innovation by developing new and more efficient methods of production
L - land (all natural resources ; renewable/ non-renewable)
L - labour (all human effort involved ; mental/ physical)

Question 3

What choices have to be made due to scarcity?

Answer 3

1. How much to produce
2. How to produce
3. For whom to produce

Question 3

Define opportunity cost

Answer 3

Opportunity cost is the cost of any action or decision, measured by the value of the next best alternative forgone

Question 4

What is the PPC?

Answer 4

The production Possibility curve (PPC) shows all the possible combinations of 2 goods that a country can produce in a specified time period, with any given state of technology

Question 5

What do points ON the PPC represent?

Answer 5

Various combinations of capital goods and consumer goods that can actually be produced when all resources are fully and efficient employed. (Productive efficient)

Question 6

What do points INSIDE the PPC represent?

Answer 6

Combinations of capital goods and consumer goods that are attainable but not all resources are fully and efficiently employed. (Productive inefficient)

Question 7

What do points OUTSIDE the PPC represent?

Answer 7

Combinations of capital goods and consumer goods that are desirable but not attainable as there is a lack of resources.

Question 8

What is the difference between unemployment and underemployment?

Answer 8

Unemployment - available resources are not utilised/ input is not maximised
Underemployment - available resources are not fully utilised/ output is not maximised for the given amount of input

Question 9

What is the difference between the shift of PPC and the movement of a point onto/ off PPC?

Answer 9

Shift - an increase/decrease in quantity of resources/ productivity (PRODUCTIVE CAPACITY)
Movement - improvement/ detoriation of utilisation of resources

Question 10

What is the marginalist principle?

Answer 10

The law of diminishing marginal utility states that the more of a good a person consumes, the less the additional utility gained from consuming one more unit of a good.