CPE

Question 1

Scarcity

Answer 1

Scarcity refers to the situation whereby scare resources are unable to satisfy unlimited human wants. Wants include present and future consumption.

Question 2

Opportunity Cost

Answer 2

Opportunity cost is the benefits one could have received by taking the next-best alternative action- it is the value of the next-best alternative foregone.

Question 3

Basic Economic Problems

Answer 3

What to produce, how to produce it, how much to produce and for whom to produce.

Question 4

Economic Efficiency/Pareto Optimality

Answer 4

Economic efficiency means getting the most value out of the available resources by allocating scarce resources to meet the needs and wants of consumers. Thus there should be no wastage and full employment of available resources. Pareto Optimality exists when economic resource and output have been allocated in such a way that no one can be made better off without making someone else worse off. Welfare is maximized as the benefit gain by one person is sacrificed by another.

Question 5

Productive Efficiency

Answer 5

There is productive efficiency when goods are produced at the lowest cost possible. When output is produced at the minimum cost, wastage of resources is minimized. Productive efficiency exists in the long-run and the short-run. It is impossible to increase the production of one good without sacrificing production of another.

Question 6

Allocative Efficiency

Answer 6

There is allocative efficiency when the economy is at full employment and all resources are fully utilized. Allocative efficiency is reached when production is Pareto optimal. The economy is producing at the point of tangency between the PPC and the social indifference curve.

Question 7

Technical Efficiency

Answer 7

Technical efficiency is reached when a producer uses the least amount of input to produce a given amount of output. Production is technically inefficient when any one input does not contribute to the enhancement of the product.

Question 8

Social Efficiency

Answer 8

There is social efficiency when SMC=SMB. Output is produced at the socially optimum level and not the private optimum level (demand=supply). The social optimum level takes into account social costs and benefits.

Question 9

Economics

Answer 9

Economics is a study of how scarce resources are allocated to the production of goods and services so as to maximize the unlimited wants that human beings desire.