Introduction to economics Flashcards
Basic economic problem
How best to allocate an economy’s scarce resources in order to satisfy the unlimited needs and wants of
individuals, firms and governments.
Factors of Production
four categories of resources that are required to produce any good or services
Land (renewable and non-renewable resources)
Labour (human capital)
Capital (physical capital)
Enterprise
Opportunity Cost
Next best alternative foregone when making an economic choice
Rewards for the factors of production
reward for land = rent
reward for labour = wages
reward for capital = interest
reward for enterprise = profit
Scarcity
finite resources of an economy relative to the unlimited needs and wants of individuals and societies
Economic good
goods with opportunity costs
The basic economic questions
What to produce ?
How to produce ?
For whom to produce ?
5 meanings of capital
physical capital human capital (skills and knowledge) natural capital Financial capital Capital
Resource allocation
assigning available resources to specific use
Distribution of income
how much output each individual or group receives
Private sector and Public sector
sector of the economy where private firms and individuals produce goods and services
sector of the economy where the government produces or supplies certain goods and services
What are the three types of economic systems
Planned economy
Mixed economy
Free market economy
Explain free market economy
relies on the market forces of demand and supply to allocate scarce resources in the economy ( price rationing system )
Minimal government intervention
Individuals and businesses resource ownership and decision making
Explain Planned economy
communist or socialist economies that strive for economic equality
more gov intervention
gov resource ownership and decision making
planned rationing system
Explain mixed economy
combination of planned and free market
some resources being owned and controlled by private individuals and firms while others are owned and controlled by the government in the public sector.
government intervenes in economic activity to correct perceived market imperfections and market failures
Production possibility curve
maximum combination of two products that a country can produce, assuming that all resources are used efficiently at any moment of time
Assumptions of the PPC model
Fixed production possibilities – The model assumes the economy only produces various combinations of two products (producer and consumer goods)
Scarcity - There is a limited and fixed amount of resources in the economy
Constant state of technology - The production techniques and technologies are assumed
to be held constant because the economy has only a certain level of technology at any
point in time
Efficiency – The model assumes that all resources are fully utilized in an efficient way
What does a linear PPC model tell you and what is marginal rate of transformation
marginal rate of transformation is the same, showing a constant opportunity cost.
the gradient on the PPC showing opportunity cost between two products in question
Marginal rate of transformation - the number of units of one product that can be increased by reducing the quantity of another product
Features of the PPC model
Opportunity cost Scarcity Choice Unemployment of resources Efficiency
Economic growth
- improve education and training in workforce
- improvement in technology
- Increase in quality or qty of FOP
- Greater population growth and more skilled migrant workers
Circular flow of income model
macroeconomic tool used to explain how economic activity and national income are determined
