Economics Unit 3

Incentives

Rewards or penalties influencing an individual or organisations decisions and behaviours. Can lead to unintended consequences if not considered.

Opportunity Cost

Value of the next best alternative use of resources, sacrificed opportunity is forgone.

Types of Factors of Production

Land, Labour, and Capital

Land Resources

Productive inputs occurring in nature eg. soil, trees, animals, clean air.

Labour Resources

Intellectual skills, manual effort, and knowledge that people provide.

Capital Resources

Man made resources used in the production process. Combines natural/land and labour resources to create more sophisticated goods/services in the future. If it isn’t used for production it is just considered a consumer good.

Production

A process of using resources (inputs) to make goods/services (outputs). Factors of production are therefore necessary to produce things we value.

Relative Scarcity or the Fundamental Economic Problem

People have unlimited needs and wants compared to finite resources at our disposal.

What are the three basic economic questions?

What/how much to produce? How should it be produced? For whom it should be produced?

Economic Models

Simplified versions if reality to look at certain interactions within an economy, by isolating important factors. All economic models have assumptions underlying their use, the level to which it is ‘good’ is determined by how well it answers the question it set out to ask.

PPF

The Production Possibility Frontier (or Production Possibility Curve) is a line on the Production Possibility Diagram that highlights the limit of what is possible to produce in a hypothetical economy with only two goods/services being produced.

Productive (technical) efficiency