Rational Decision-Making

Question 1

What is the assumption of rational decision-making?

Answer 1

All economic agents are assumed to be rational in their decision-making and to make choices that maximise their self-interest. Hence, society’s resources will be allocated efficiently.

Question 2

What does rational decision-making involve?

Answer 2

Weighing the marginal benefit against the marginal cost of any activity

Question 3

What is marginal benefit?

Answer 3

The additional benefit gained from consuming or producing one more unit of the good/service

Question 4

What is marginal cost?

Answer 4

The additional cost incurred by the firm from producing and selling one more unit of the good/service

Question 5

What does the marginalist principle say?

Answer 5

If MB>MC, it is rational to do more of the activity
If MC>MB, it is rational to do less of the activity
When MC=MB, the adjustment process will reach equilibrium

Question 6

What is economic efficiency?

Answer 6

Situation where each good is produced at the minimum cost and where individual people and firms get the maximum benefit from their resources

Question 7

What are the 2 basic concepts of efficiency?

Answer 7

Productive and allocative efficiency

Question 8

What is productive efficiency?

Answer 8

Achieved when firms in an economy are producing the maximum output for the given amount of inputs, or producing a given output with the least combination of inputs

Question 9

What is allocative efficiency?

Answer 9

Achieved when the current combination of goods and services produced and consumed allows the society to attain the greatest level of satisfaction

Question 10

What does the PPF show?

Answer 10

The maximum attainable combinations of two goods and services that can be produced in an economy, when all available resources are used fully and efficiently, at a given state of technology.

Question 11

What are the 5 assumptions of the PPF?

Answer 11

1. The economy only produced 2 goods or services
2. Production is observed over a specific time period
3. The quantity and quality of resources used remain the same over the specific time period
4. Resources are fully employed and efficiently utilised
5. There is no change in the level of technology

Question 12

What does the PPF illustrate?

Answer 12

1. Scarcity
2. Constraints
3. Choice
4. Opportunity Cost
5. Productive Efficiency
6. Underemployment and Unemployment
7. Allocative Efficiency

Question 13

What does the concave shape of the PPF illustrate?

Answer 13

Increasing opportunity cost in the production of Good A in terms of Good B forgone: as more of good A is produced, larger and larger quantities of the alternative good B must be sacrificed

Question 14

What is actual economic growth?

Answer 14

• Short-run growth
• Measured by percentage annual change in national output actually produced
• Illustrated by movement from a production point within PPF to a production point on the PPF

Question 15

What is potential economic growth?

Answer 15

• Long-run growth
• Increase in productive capacity of the economy
• Illustrated by an outward shift of PPF

Question 16

What are the 3 main sources of potential economic growth?

Answer 16

1. Increase in quality of resources
   2 Increase in quality of resources
2. Technological advancement

Question 17

What does an outward shift in the PPF imply about productive capacity?

Answer 17

Productive capacity has increased