Economic Methology And The Economic Problem - Micro Flashcards
What do PPF graphs show?
how societies allocate limited resources to provide a combination of goods and services
What limited resources do PPFs help us understand the allocation of?
- Land
- Labour
- Capital
What do all the points on the boundary have in common?
They are all productively efficient but not allocatively efficient
What does each point on a PPF represent?
The quantity of each good being produced
What does the slope on a PPF represent?
The opportunity cost of producing one more unit of a good (the steeper the slope, the higher the opportunity cost)
What does moving along the PPF show?
The trade off between producing more of one good and less of the other
What do points inside the PPF represent?
An inefficient use of resources
What can an inefficient use of resources be a result of?
- Labour shortages
- Technological limitations
How is economic growth measured on a PPF?
By an outward shift
How can economic growth occur?
- An increase in societies resources
- Technological advancements
What is the boundary?
The PPF curve
What does being productively efficient mean?
All resources are fully employed
It is impossible to produce more of one good without producing less of the other
What is allocative efficiency?
When the combination of goods produced aligns with societies demands
When is allocative efficiency achieved?
When the number of goods and services produces meets an economy’s needs by maximising social welfare
Why aren’t all boundary points allocatively efficient?
- Society may prefer different combinations of goods than what the PPD produces at its boundary
- The PPF assumes a constant opportunity cost but these can change
How can an inward shift in the graph be caused?
- Natural disasters (they destroy resources)
- War (destroys natural resources)
- Global warming (rising sea levels and extreme weather destroys resources)
- Long recession (businesses close, unemployment rises and workers lose skills
How can an outward shift in the graph be caused?
- Improvements in the technology
- Discovering new resources (more factors of production to use)
- Better education/ training (higher productivity)
- Larger working population (more immigration/ increase retirement age)
What is an opportunity cost?
The cost of the next best alternative foregone
What is an economic good?
A good that has an opportunity cost when consumed (because you’re using scarce resources)
What is a free good?
Has no opportunity cost when consumed because it doesn’t use scarce resources
What are capital goods?
Goods bought by firms, for firms
What is the basic economic problem
- infinite wants but scarce resources
- what to make and how much
- how to make it
- who it goes to
What is a positive statement:
A statement which can be proven with facts
