Limited Resources, Unlimited Wants Flashcards
Where is scarcity true?
Everywhere, scarcity is a universal fact.
What is the fundamental economic problem?
We must use our limited resources to produce the items that we value most highly.
What are the two implications of unlimited wants?
Because of scarcity there is a maximum amount of G + S we can produce
We have to make choices on what to produce and what wants and needs to satisfy
How can we get the most out of resources and what does this depend on?
To get the most out of our resources we must allocate them, this depends on economic systems.
What is an economic system?
It is how each society uses the property right, resource allocation arrangements and incentives to solve the economic problem.
What does PPF stand for?
The Production Possibilities Frontier, also known as the PPC (Production Possibilities Curve)
What is the PPF used to illustrate?
The ideas of scarcity, choice and opportunity cost for a country as a whole can be illustrated by the PPF.
What is the PPF/PPC?
The boundary between combinations of goods and services that can be produced and those that cannot. It also shows the maximum combination of outputs given resources and technology.
What are goods and services that can be produced called on a PPF?
Attainable
What are goods and services that can not be produced called on a PPF?
Unattainable
How can scarcity be shown on a PPF graph?
Because you can have a result on the line but not under it. This shows scarcity as going beyond the line is impossible since we don’t have the resources or technology.
How can inefficiency be shown on a PPF graph?
With a point inside the PPF. This is an inefficient use of resources because it is possible to have more of both goods by being on the production possibility curve
How can choice be shown on a PPF graph?
Choice is illustrated by the choice we need to make between available combinations along the production possibility curve
How can opp cost be shown on a PPF graph?
Opportunity cost can be illustrated by the negative slope of the curve which indicates that more of one good can only be obtained by sacrificing the other good.
How do you calculate the opp cost when you move from a point in the graph to a point on?
There is no opportunity cost if you move in this way
Can you consume at a point beyond the line?
Yes, when you have trade deficit
What is trade deficit?
When you import more than you export, your imports are worth more than your exports
How do you calculate GDP?
Consumers + Governments + Firms + (exports - imports)
C + G + I + (x - M)
What’s the difference between GDP and GNP?
GDP is within the border of the country, GNP is not within the border. GNP includes the goods and services companies of that country have produced outside the border.
What are the two types of economies worldwide?
Open and closed
What is a closed economy?
A country that has a closed economy does not trade with the rest of the world
What is an open economy?
A country that has an open economy does trade with the rest of the world.
What does the gradient of a PPF show?
Opportunity cost
What is the opportunity cost of CDs in cassettes?
The number of cassettes you must give up for an additional or extra CD. (Marginal cost)
What is specialisation?
Non homogeneous resources, not all resources are equally productive in all activities.
What is the law of increasing (opportunity) cost?
This law states that the more you produce of a good, the more you have to give up of the other good.
Why does the law of increasing opportunity cost happen?
Because of specialisation. The first resources that are switched are less specialised.
What happens to the PPF if there is no specialisation?
The opportunity cost is equal and the slope is linear.
How do you calculate the gradient of a linear slope?
Change in y over change in x
How do you calculate the gradient of a curved slope?
Create a tangent and then calculate change in y over change in x
Are points on the PPF efficient?
Yes, if a point is on the PPF it means resources are being fully utilised.
When is production efficiency achieved?
When you cannot produce more of one good without producing less of another
How is the opportunity cost calculated on the PPF?
Decrease over increase
Give up over gain
If your PPF is bowed outwards, will opportunity cost increase or decrease when you go up and down?
It will always increase whether you go up or down
If you know the opportunity cost of CDs/cassettes how can you calculate the opportunity cost of cassettes per CDs?
It is just the reciprocal
In macro terms what is economic growth?
Increase in GDP
In micro terms what is economic growth?
An outward shift of the PPF
What are two ways to outwardly shift the PPF?
- Better use of resources
2. Increase capital goods
What is the type of econ growth with better use of resources?
Intensive econ growth
What is the type of econ growth with increasing capital goods?
Extensive econ growth
What is the difference between extensive and intensive economic growth?
Extensive might lead to an outward shift, intensive might lead to an outward shift OR a rotation.
What is a rotation?
A shift but only to one side. You want a shift outwards and to the right.
What is economic contraction?
An inward shift due to less resources
What is the opportunity cost of economic growth?
Less consumer goods today
What is the law of diminishing return?
When the amount of one input is increased in equal increment, holding all other inputs constant, the result will be smaller increase in output.
In what ways can the Law of Diminishing Return be explained?
- Output increasing but at a decreasing rate
- Marginal product of Labour decreases
- Marginal cost decreases
- Profit decreases
Why does specialisation cause increase?
Because of division of labour
Why does the rate of increase decrease with the law of diminishing return?
It increases because of specialisation but the rate of increase can decrease because of exhaustion of specialisation.
What does improvements in weather do to the PPF?
Shifts it out
What does better use of unemployed resources do to the PPF?
You move from a point in to a point on the line
