Scarcity / Choice / Opportunity Cost Flashcards
What are some BASIC economic concepts?
scarcity exists
choices MUST be made
rationing system
scarcity = value
consumer surplus
equity v. efficiency
What is scarcity?
when a resource is limited in supply & demand/ something that is in limited quantity but desired
therefore, scarcity is a function of supply & demand, so if demand is high relative to supply, the resource is then scarce
Why must choices be made?
because scarcity exists choices must be made for the best allocation
choose between competing systems
What are rationing systems?
the system decided on how to manage the scarcity
e.g. lottery
first come first serve
merit-based
What is the relationship between scarcity and value?
something that is scarce is valuable
therefore, scarcity = value = utility
also depends on situation, location & conveniency
What is consumer surplus?
is the difference btw what a person is willing to pay and the actual price
What is the difference btw equity and efficiency?
equity = fairness efficiency = most socially optimal use
what is equitable may not always be most efficient & vice virsa
e.g. lottery = fair chance but not efficient
auction = not fair but efficient
What is economics then?
economics is the study of choices leading to the best possible use of scare resources in order to best satisfy unlimited human needs and wants
Can you explain the diamond/water paradox?
first start with paradox. Paradox = contradictory statement that may be true
margin / marginal = next
demand = marginal benefit (MB) / value of one more
as # of smt increases, MB always decreases
supply = marginal cost (MC) / $ to make 1 more unit
cost DOES NOT EQUAL price
cost = how much $ business used to make unit
price = what consumers pay
Price = is the intersection of supply & demand
What are the 3 basic economic Qs?
What to produce?
How to produce?
For whom to produce?
What are the types of goods and which economic Q do they answer?
What to produce?
capital
consumer
durale
in/non-durable
What are capital goods?
goods used to produce other goods
What are consumer goods?
final product
What are durable goods?
a good that lasts for > 3 years
What are non-durable goods?
a good that lasts < 3 years
What are the What & How Qs classified under?
resource allocation
What are resource allocation terms?
re allocation
overallocation
underallocation
What does reallocation mean?
if a decision made has to be modified bc of a change in amount of goods
What is overallocation?
smt with wrong amounts produces, relative to what is socially desired
What is underallocation?
too few desired goods/services produced
What is the For Whom Q classified under?
distribution of output & input
needs to target audience wants / likes / interests
just for ourselves & trade
What is output?
who is receiving goods
What is input?
who is getting $
What is the relationship between output & input?
peoples output depend on their income
What is redistribution of income?
when distribution of O & I changes drastically in social groups
What are the factors of production?
Land / natural
Labour
Capital (physical)
Entrepreneurship (management)
What are land production factors?
gifts of nature
includes all agricultural and non-agricultural land
all nature under and over
What are labour production factors?
all forms of human input (mental & physical)
limited to #s & skill
What are capital production factors?
manmade factor of production used to produce goods / services
What are entreprenuership factors of production?
ability to innovate / take risks / seek opportunities
organises the other 3 factors
What is utility?
satisfaction derived from the consumption of goods & services
What is opportunity cost?
value of next best alternative not taken that must be sacrificed to obtain smt else
What are the 4 key components of opportunity cost?
several alternatives available
choice must be made
decision maker limited to choices - ‘time & space’ defined NO TOMORROW
What are some generalisations made in regard to opportunity cost?
choosing is refusing
people’s values differ
people cannot escape opportunity cost
What does TNSTAAFL stand for?
There is NO Such Thing As A Free Lunch
everything in life as an associated cost
What is the difference btw explicit and implicit costs?
explicit = bills, pay, save etc.
implicit = emotional, physical, etc.
What does the Production Possibilities Curve / Frontier (PPC / F) show?
it shows different combinations of 2 goods that can be produced
= efficiency + NO WASTE
What are production possibilites?
different combinations of 2 goods that can be produced using full resource employment
What is the law of increasing opportunity cost?
when ALL RESOURCES are being USED and INCREASE IN PRODUCTION of 1 good will = INCREASED FORGONE production of OTHER GOOD
What are the types of PPC curves and why?
linear / constant opportunity cost
= conditions to produce goods are similar
curve / increasing opportunity cost
= conditions to produce goods are different
What are the PPC shifters?
faster computers & tech = increase
destruction of power plant = decrease
increased unemployment = same (NOT DEAD)
increased education = increase
What are some key concepts for PPC?
scarcity
actual output - where it is on the PPC
potential output - point of PPC @ a particular time
economic growth / development - increase in quantity / quality of resources + nation’s output will determine standards of life
