scarcity and choice Flashcards
what is the basic economic problem
the basic economic problem is scarcity. wants are unlimited and recourses are finite, so choices must have to be made. resources have to be used and distributed optimally
what is an economic good
economic goods benefit society, have the problem of scarcity and have an opportunity cost. since they are scare, they have some value, so consumers will pay for them
what is a free good
free goods have no opportunity cost, because there is no scarcity of the good. for example air and water are free goods. these goods are not traded because they are freely available
when producing goods what must the economy concider
what to produce
how to produce it
for whom to produce it
why should the economy consider what goods to produce
what to produce is determined by what the consumer prefers. consumers tell producers what they prefer by demanding goods and using their ‘spending votes’
why should the economy consider how to produce goods
producers seek profits and aim to minimize production costs
why should the economy consider whom to produce goods for
whoever has the greatest purchasing power in the economy, and is therefore able to buy the good.
why is opportunity cost important to economic agents
Opportunity cost is important to economic agents, such as consumers, producers
and governments. For example, producers might have to choose between hiring extra staff and investing in a new machine. The government might have to choose between spending more on the NHS and spending more on education. They cannot
do both because of finite recourses, so a choice has to be made for where resources are best spent
what is opportunity cost
The opportunity cost of a choice is the value of
the next best alternative forgone
how is productivity calculated
output per worker per period of time
how can productivity be increased and how does it affect output costs
productivity can be increased by training workers or using more advanced capital machinery.
being more productive also lowers average costs per unit of output
what does being more productive mean
being more productive means the same input, such as the number of workers, produces more output, over the same period of time
what does less productivity require
being less productive requires a larger input to produce the same quantity of output
what is specialization
Specialisation occurs when each worker is completes a specific task in a production process. it shows shows how,
through the division of labour, worker productivity can increase. Firms can then take advantage of increased efficiency and lower average costs of production.
who can specialisation be achieved by
Specialisation can be achieved by individuals, businesses, regions of countries or countries themselves
what are the advantages of specialisation on a global level
greater world output, so there is a gain in economic welfare.
lower average costs, since the market becomes more competitive
there is an increased supply of goods to choose from
there is an outwards shift in the PPF curve
what are the disadvantages of specialization on a national level
less developed countries might use up their non-renewable resources too quickly, so they might run out
countries could become over-dependent on the export of one commodity, such as wheat. if there are poor weather conditions, or the price falls then the economy would suffer
what are the advantages of advantages of specialization at a individual level
higher output and potentially higher quality, since production focusses on what people and businesses are best at
there could be a greater variety of goods and services produced.
there are more opportunities for economies of scale so the size of the market increases
there is more competition and this gives an incentive for firms to lower their costs, which helps to keep prices down
what are the disadvantages of specialization at a individual level
work becomes more repetitive, which could lower the motivation of workers, potentially affecting quality and productivity workers could become dissatisfied.
there could be more structural unemployment, since skills might not be transferable, especially because workers have focused on one task for so long
by producing a lot of one type of good through specialization, variety could in fact decrease for consumers
there could be higher worker turnover for firms, which means employees become dissatisfied with their jobs and leave regularly
what are the 4 factors of production
capital
enterprise
labour
land
what is a production possibility frontier (PPF)
a ppf shows the maximum productive potential of an economy, using a combination of two goods or services, when resources are fully and efficiently employed
what causes the ppf curve to shift outward
An increase in the quantity or quality of resources shifts the PPF curve outwards, so the productive potential of the economy increases, and there is economic growth. This can be achieved with the use of supply side policies
what does it mean when the ppf is a straight line
the marginal opportunity cost is constant. This is because the amount of one good given up to produce the other does not change. This is not realistic because resources are not fully adjustable to produce both good A and good B.
what does it mean when a ppf has a concave shape
increasing opportunity cost. This is more realistic than the straight line. Producing more of good B decreases the relative output of B and leads to a relatively higher loss of the output of A
when drawing a original ppf curve what is assumed
a fixed amount of resources are used
there is a constant state of technology
what does a ppf show
the opportunity cost of using the scarce resources
