Scarcity, Choice and Opportunity Cost. Flashcards
What is the Economic Problem?
We have SCARCE resources to satisfy our UNLIMITED WANTS. As a result of scarcity, we have to make a CHOICE.
What are Resources, and Factors of Production?
Resources are inputs available for the production of goods.
Factors of production are anything useful in the production of goods and services.
Land. (Factor of Production)
Natural resources such as lakes, rivers, forests, the land that a factory or farm is built on, mineral deposits below the surface, climate, etc.
The reward for owning land is the income that is generated.
Labor. (Factor of Production)
Human Resource. The determinant of this is a nation’s population, however not all of the population is available to work as some may be below or above working age and some may not choose to work.
The reward for owning land is salary/wage.
Capital. (Factor of Production)
Any man-made aid to production. Helps land and labor produce more units of output. Capital can range from something as simple as a spade to a car-assembly plant.
The reward for owning capital is the rate of return earned.
Enterprise. (Factor of Production)
Enterprise consists of two roles:
1. Organizes the other 3 factors of production.
2. Takes on the risk of production.
In small firms with few resources, the role of enterprise is taken on by a single Entrepreneur.
In larger and more complex firms, the role of organization is taken on by salaried managers whilst the shareholders take on the risk of production.
The reward for enterprise is profit.
What is good factor endowment?
Some economies have a large quantity of good quality factors of production at their disposal. They can create lots of goods and services to satisfy the wants of their population. They are said to have good factor endowment.
What is Production?
To create goods and services (which satisfy our wants), RESOURCES are combined in the process of production.
What is Consumption?
The process through which individuals use up goods and services to satisfy wants is consumption.
Explain needs and wants. How do needs and wants differ from one person to another? (Explain through scale of preferences)
Needs are things that are essential for survival such as food, water, shelter, clothing.
Wants are less essential but they improve our quality of life. They are luxuries.
What might be considered a luxury for one person may be considered a need for another.
This is because everyone has a scale of preferences, which is the product of upbringing, influences, culture, life-experiences. These influence our likes and disliked.
What are consumer durables?
Some goods are used up quickly (food). Some satisfy our wants over a long period of time such as vehicles, houses, TVs, these are consumer durables.
How are wants unlimited?
Our wants are continually expanding and changing.
What is opportunity cost and how does it relate to choice.
Given unlimited wants and limited resources, we have to choose which wants to satisfy.
Opportunity cost is the price expressed in the form of the best alternative that is forgone when we choose.
Suppose we have $10, we go to a shop which sells chips for $5 and chocolates for $10 each.
Since we only have $10, we can’t choose both and therefor have to make a choice between them.
If we choose a chocolate, then we know that the opportunity cost of it was 2 chips.
And if we buy 2 chips, then we know the opportunity cost of it was 1 chocolate.
What to Produce? How to Produce? And for whom to Produce?
Since we cannot produce everything, we have to choose what to produce and in what quantity. Do we produce better clothing and food to improve standard of living or better weaponry to improve our defenses?
We also have to decide how to use our resources so that the best outcome arises, the maximum use out of a resource. We also have to keep moral obligations and environmental health in mind.
We also have decide whose wants to satisfy. Will everyone have a more or less equal share of what is produced? Will some have more than others?
What is ceteris paribus?
Other things remain equal. This simplifies an actual situation by assuming that part from a single change in circumstances, everything else is unchanged.
What is the margin?
A small change in one economic variable will lead to further small changes in other variables. This predicts what the impact of a change might be.
Describe all 3 time dimensions assessed with factors of production.
The world changes.
Short Run: It is possible only to change some inputs or increase/decrease them.
An example of this is labor, w/ ceteris paribus we can assume that if the amount of labor is increased, output will increase.
Long Run: All factors of production or resources can change. Building a new factory to increase outputs, etc.
Very Long Run: All factors of production as well as key inputs can change. Technology, government regulations, social considerations change over long periods of time.
Describe positive and normative statements.
Positive statements are based on empirical evidence. “will”
Normative statements are when values or opinions come into analysis, they are subjective. “should”
Describe specialization and exchange.
To increase goods and services in an economy, individuals, firms and nations concentrate on producing some goods and services (where they have an advantage) rather than others.
No one is self-sufficient, but they are specialists. So they produce a surplus and trade for the surplus of others.
Overtime specialists skills may become redundant, individuals need to be flexible and move between occupations.
Describe division of labor.
The process of manufacturing is split into individual tasks instead of one individual creating one product. This is faster, manufacturing lines.
What do specialization and division of labor help in?
These help in increasing output and meeting more wants.
Describe Economic Structures.
Economic Structures organize an economy.
Primary: agriculture, mining, fishing, oil extraction, etc. Collecting raw materials.
Secondary: manufacturing activities. Food processing, textile, clothing, vehicle manufacturing, electronics. Using raw materials to create goods.
Tertiary: Service sector, covers a range of activities such as retailing, transport, banking, insurance, education, logistics, etc.
Quaternary: Knowledge based part of economy. Provision of information, scientific research, product development, computing and ICT.
As economies develop, their structure changes and progresses. Tertiary is the primary employer of developed countries.
What is a market, and market mechanism.
A market is a place where buyers and sellers get together to trade.
Market mechanism is where decisions on price and quantity are made on the basis of supply and demand.
Describe how choices are and can be made through the systems of resource allocation (economic systems).
- Market/Free economy: decisions on allocation of resources are made by households and firms. They interact as buyers and sellers in the market for goods and services. Prices indicate the market value of a resource.
- Planned Economy: Central planning boards and organizations make decisions in enterprises that are state-owned or under state regulation and control. Centralized and less issue with unemployment. The government takes responsibility for the allocation of resources, production targets setter, distributes income and determines wage, owns most productive resources and property, plans long-term growth.
- Mixed Economy: Reality. Both private and public sectors in the process of resource allocation. Decisions on important economic issues require planning and interaction between govt, businesses and labor through market mechanism.
Govt: security, healthcare, transport, telecommunication.
