Topic 1 Flashcards
Introduction to Economics
What is the PPC?
It is an economic model that depicts several concepts such as scarcity, efficiency, opportunity cost, economic growth/development as well as choice.
What does the PPC represent?
The ppc represents all the different combinations of output that can be produced given the current resources and technology.
What is scarcity?
Scarcity refers to the idea that resources are insufficient to satisfy the unlimited wants and needs of humans.
What is choice?
Choice isillustrated by the available combinations along the production possibilities curve.
What is choice in relation to scarcity?
Since resources are scarce, it is not possible for all human needs and wants to be satisfied. This means that choices must be made about what will be
produced and what wil be foregone (not produced and therefore sacrificed).
Efficiency
It refers to making the best possible use of scarce resources to avoid waste of resources.
Efficiency in relation to scarcity
In view of scarcity of resources, it is important to use these in ways that ensure they are not wasted. In part, efficiency means using the fewest possible resources to produce goods and services.
Why does scarcity force choices to be made?
Since people have unlimited needs and wants, but resources are scarce, hence not everything they desire can be satisfied, hence, people must make a choice.
If there was no scarcity, a choice would not be necessary, since society could produce as much of each as was desired.
Scarcity forces producers into making a choice regarding the combination of goods they want to produce.
Opportunity Cost
Opportunity cost is the value of the next best alternative forgone or sacrificed when making an economic decision.
Where does opportunity cost rise from?
It rises from the fact that time is limited or scarce; if it were endless, one would never have to sacrifice any activity in order to do something else.
How does the ppc show scarcity?
The curve itself shows scarcity, it shows constraint and limits the number you can produce. Each point on the ppc shows choice. Ex - a country chooses to produce at x or y point.
The concept of scarcity prevents a country from producing outside/above the ppc, because there arent adequate number of resources.
Linear Opportunity cost
If the line were to be straight, then it would mean that resources would be allocated between different outputs immediately, which in this case could be oranges and lemons, since they require the same factors of production. This would therefore mean constant opportunity cost
What is increasing opportunity cost?
The graph is a concave shape due to the fact that opportunity cost increases at an unequal rates. The increase in opportunity cost is unequal because not all of the factors of production used to produce the other output are substitutable. This disparity in the allocation of and redistribution of factors of production increases opportunity cost as more units are produced.
What is resource allocation?
Resource allocation answers the three basic questions. It means how do you choose to allocate resources amongst their different uses.
If an economy decides to change the amount of goods and services, then you need to reallocate resources accordingly. This can occur if there is either overallocation or under allocation of goods and services.
What causes an outward shift in the ppc? [4]
- Discover or develop new raw materials. Example: discover new oil fields
- Employ new technology and production methods to increase productivity
- Increase labour force by encouraging birth and immigration, increasing retirement age etc.
- An outward shift in PPC, that is higher production possibility, will lead to economic growth.
What causes an inwards shift in the ppc? [4]
- Natural disasters, that erode infrastructure and kill the population.
- Very low investment in new technologies will cause productivity to fall over time
- Running out of resources, especially non-renewable ones like oil or water
- An inward shift in the PPC will lead to the economy shrinking.
