Economics 1.1

what is economics

study of choices leading to the best possible use of scarce resources in order to best satisfy unlimited human needs and wants

define sustainability

maintaining the ability of the environment/economy to continue to produce and satisfy needs and wants into the future

relationship between scarcity and sustainability

the problem of sustainability arises because resources are scarce and we want to preserve the environment and resources over time

problem of choice

• scarcity exists because of factors of production are finite but wants are infinite

• choices are needed in every economic decision

• when there is a choice there is a sacrifice

3 basic economic questions

• what/how much to produce?

• how to produce?

• for whom to produce?

what is the cost of choice

opportunity cost

3 economic systems

free market economy, planned economy and mixed economy

what is government intervention

occurs when the government uses different methods (policies) to interfere with the free market

changing allocation of resources, eventually changing prices and quantity produced/consumed

what is the production possibility curve

a curve that shows the combination of the maximum amount of two or more goods that can be produced (by firm/economy) when all resources are used efficiently

what are points on the ppc called

production possibilities

what is actual output

the current level of production which is shown on or inside the PPC

what is potential output

the maximum level of output that can be produced using all resources efficiently

how come you cant have a point beyong the curve

unattainable at current resources shoes concept of scarcity

what is a constant on the PPC

technology and resources

what does it mean if the PPC is a straight line

opportunity cost is constant as we move from one point to the other

good A and good B are proportional

what does a constant opportunity cost mean

factors of production are equally well suited to produce 2 goods

why is a straight line PPC not realistic

for each additional unit produced of 1 good there is no opportunity cost of the other good

PPC on a curve

Opportunity cost is present

when there is an increase in production of one good over another (known as increasing opportunity cost)

why does increasing opportunity cost happen

because of the specialisation of factors of production

as we move production from one point to another → unlikely that factors of production will be as productive

as you produce one good the amount of another good you are giving up to make another unit grows larger

what does lack of specialisation in factors of production mean

constant opportunity cost as factors of production are equally good as producing both goods

show choice on the PPC

chooses to produce on or inside the ppc

chooses to produce any combination of the goods

show unemployment of resources

any point inside the PPC shows FOPs not used to highest efficiency

actual growth on PPC

increasing production using current resources

movement from a point inside the curve to outside shows increased efficiency

potential growth on PPC

shift of the curve outwards

now more resources