The Economic Problem Flashcards
Economics
the study of scarcity and how we use the worlds limited resources in an attempt to satisfy human’s unlimited wants.
Ceteris Paribus
all things being equal
Scarcity
the demand for a good or service is greater than the availability of the good or service
Needs
things that are essential for life in our society and they don’t change. e.g. food, water, shelter.
Wants
things that are desired because they give us satisfaction e.g. goods and services.
Recurrent Wants
wants that are never fully satisfied and keep recurring e.g. foods.
Complimentary Wants
wants that naturally go together e.g. house, furniture, plants
Competitive Wants
goods/services that can be substituted for each other. e.g. butter, margarine.
Opportunity Cost
the best alternative opportunity forgone when a choice is made. Also known as economic cost or real cost.
Relative Scarcity
a universal problem which refers to the insuffiencey of resources to wants.
Economic Problem
refers to the problem of satisfying unlimited needs and wants of individuals with limited resources.
Production Possibility Curve
a graph that shows all of the different combinations of output that can be produced given current resources and technology
What does the Curve Show
also known as the frontier. It demonstrates scarcity as you cannot produce anything beyond the curve. Shows tradeoff and opportunity cost as each point gains or loses something compared to other potential points.
First Economic Assumption
an economy aims to use all its resources fully and efficiently.
Second Economic Assumption
there are only two goods produced in simplified economy.
Third Economic Assumption
resources and the level of technology are fixed.
Fourth Economic Assumption
all resources can be used to produce each good, hence there must be perfect mobility between production of the 2 goods.
What do the Economic Assumption Do
they aim to help economists analyze economic behavior by simplifying real world situations.
Ways to Push the PPC Outwards
better machinery/technology, better health, better resources, better education and more people.
Ways to Push PPC Inwards
natural disaster, war, disease, famine
4 Factors of Production
land, labor, capital and enterprise
Land
term to describe the materials and resources provided by nature e.g. minerals, fuel, plants, water and animals. The income related to land is rent.
Labor
a factor of production; to adapt a natural resource for human use labor is needed. e.g. people. The income related to labor is wages.
Capital
any human made instrument of production; it is when goods are not directly consumed but are converted into other goods. e.g. tools, machinery, factories, money. The income related to capital is interest.
Enterprise
the ability to initiate the production process by organizing and combining all necessary factors of production. e.g. Elon Musk (Tesla). The income related to enterprise is profit.
How do the Factors of Production Link to Income
the income earned from land is rent, workers receive wages in return for labor, the income earned from capital is interest which is the return paid on those who provide financial capital, the income earned from enterprises is profit
Technical Efficiency
producing goods and services using the least amount of resources
Allocative Efficiency
ensuring that resources are used to produce the combination of goods and services most desired by society.
Subsistent Economy
individuals produce commodities primarily for their own use and not for exchange through the market.
Capitalist Market Economy
important economic decisions are driven by supply and demand and individuals run their businesses with little government interference.
Command Economy
government has significant control over all economic activity.
Mixed Market Economy
combines aspects of capitalism and socialism allowing businesses to operate individually while government regulates industries and provides public services.
