Unit 1: The Economic Problem Flashcards
Economic Problem
An economic problem arises from the fundamental issue of scarcity
Scarcity
refers to the limited availability of resources in comparison to the unlimited wants and needs of individuals and society.
e.g. Malta’s small geographical size leads to land scarcity influencing housing availability and infrastructure development
Choice
refers to the act of selecting one option from a set of alternatives, regarding the allocation of resources, due to the problem of scarcity. The gap between the limited resources and the infinite human wants necessitates choice. People make choices about what, how and for whom.
Opportunity Cost
the value of the next best alternative forgone when a decision is made.
e.g. a student in Malta decides to pursue a degree at the university of Malta instead of entering the workforce immediately. The opportunity cost is the income they could have earned during those years of study.
Production Possibility Curve (PPC)
illustrates the maximum a society can produce given its current scarce resources
Assumptions of PPC
- only 2 goods can be produced
- resources are fully employed
Concave PPC
a PPC is concave depicting increasing opportunity cost as more of one good is produced. This shows that resources are not equally suited to the production of all goods i.e. resources are not perfectly adaptable.
e.g. producing more cars may require reallocating labour and machinery from industries like agriculture, which are not as efficient at making cars.
Linear PPC
PPC is a straight line where the opportunity cost remains constant as more of one good is produced. Resources are equally efficient in producing both goods i.e. resources are perfectly adaptable
e.g. if a factory produces either tables or chairs and the resources are equally effective for both, the opportunity cost of switching between the two remains constant.
Convex PPC
a PPC is convex to the origin when the opportunity cost decreases as more of one good is produced. This happens when producing goods that benefits from specialization or economies of scale i.e. the more you produce, the easier and cheaper it becomes to produce even more.
e.g. in highly automated industries, producing more units might lower costs due to economies of scale.
Point inside the PPC
represent inefficiency or underutilization of resources due to inefficient allocation of resources, unemployment of labour or capital and/or underdeveloped or misused technology. With the same level of resources the economy can produce a higher output.
e.g. a country producing fewer goods that it could due to a high unemployment rate or idle factories.
Point on the PPC
represent maximum productive efficiency, where all resources are fully and efficiently utilized
Points outside the PPC
are unattainable with the current resources and technology. The economy lacks the resources or technology to produce that level of output. Such points can be only achieved through economic growth and trade with other countries.
e.g. a country aiming to produce more goods than its resources currently allow
Shift of PPC
A shift occurs when the entire PPC moves outward or inwards, indicating a change in the economy’s productive capacity.
e.g. change in the quantity or quality of resources
Pivot of PPC
a pivot occurs when the PPC rotates around one of its endpoints, changing the maximum production of one good while leaving the other unchanged. The economy becomes better at producing one good, while the production potential for the other good remains constant.
e.g. a technological breakthrough in agriculture increases food production but does not affect the production of machinery
Swing of the PPC
a swing occurs when the curve partially expands, increasing the production potential of one good more than the other. the economy can produce less of one good and more of the other.
