Basic Economic Concepts (Goods, PPC, Different Economies)

What is scarcity?

the situation when resources are limited but wants are unlimited

What is economics?

A social science that looks into how economic agents make choices to allocate limited resources to satisfy unlimited wants.

What is the basic economic problem?

Scarcity

(Finite resources, infinite wants)

What is opportunity cost?

When making a choice, the cost of the next best thing not chosen.

What is the marginal principle?

the consideration of whether an increase of one thing is worth the resulting increase (or decrease) of another thing.

basically economic agents doing differential calculus.

What are the 3 basic questions that economics sets out to investigate?

What to produce

How to produce it

Whom to produce it for

Positive vs Normative statement

Positive statements → Facts (Can be true or false)

Normative statement → statements on what things ought to be, should be etc. (subjective)

ceteris paribus?

All else equal

Rigorous definition of the

short term

long term

very long term

short term: period of time where a company can vary 1 factor of production

long term: period of time where a company can vary all factors of production

very long term: period of time where technological advancements and government policy changes become relevant.

What are the 4 factors of production?

C.E.L.L

Capital (Assets, produced stuff you buy for further production)
Enterprise (The boss, a decision maker, risk taker and innovator)
Land (The place where production takes place, as well as everything that come from the specific land)
Labour (The people who work to produce the goods / services)

Give the advantages and disadvantages of specialisation

Advantages:
Lowers average cost of production (because of division of labour)
More efficient (when you specialise, you dont have to keep switching to other tasks, you focus on your own and do it fast)

Disadvantages
Workers who do only one task can get bored (demotivated)
Firms that overspecialise in one thing are vulnerable to economic changes (lets say covid hits, and you only relied on tourism, then gone loh)

What is division of labour?

A process of production whereby the production procedure is broken down several parts, with different workers are assigned to specialise in particular parts according to their skills.

The rewards to the 4 factors of production

Capital - Interest

Enterprise - Profits

Land - Rent

Labour - Wages

What is the role of the entreprenuer?

This person takes risks and makes the decisions on the What, How and For Whom questions. They organise the other factors of production to make them more efficient.

What is a market economy?

TLDR: Market forces determine the resource allocation. Governmental intervention is 0 or very minimal

Market economies are economies where government intervention in the market is zero or very minimal. Supply and demand are determined by market forces, with the consumers buying to maximise satisfaction and the firms producing to maximisew their profits.

The government’s only role is to maintain social stability and the economy’s welfare.

Competition is very high in market economies, as every firm will strive to make thier product as attractive as possible to the consumer.

What is a centrally planned economy?

TLDR: Government makes all the decision on resource allocation: who to produce what and how, and who can buy what.

A centrally planned economy is one where the government is in complete control of all resource allocation. Consumers do not get to buy whatever they want, nor could companies produce whatever they deem suitable. The government decides what should be produced and consumed.

What are mixed economies?

TLDR: The economy is governed partially through price signals and partially on governmental direction

Mixed economies are most economies in the world. The market is generally free, but the government may intervene in it through subsidies and taxation or other policies.

What are transition economies?

Transition economies are those that are transitioning from a centrally planned economy to a mixed economy.

China is an example.

What are the 3 main assumptions behind a PPC diagram?

1) that resources are limited

2) that only 2 categories are being considered

3) that technology to produce the goods in question is constant in the timefram considered

What is a PPC diagram?

The PPC diagram shows you all the maximum possible combination of 2 economic goods that can be produced given the available resources and technology.

What does it mean when a point on a PPC diagram is:

1) along the curve

2) outside of the curve

3) inside of the curve.

And what is the main problem faced for each of the points?

1) such a point represents maximum efficiency in producing the combination of the 2 goods. There is full employment of resources.

Main problem faced: choice, to produce more of A or B?

2) such a point represents a state of production that is currently unattainable due to either limited resources or technology.

Main problem faced: scarcity, resource/technology limited

3) such a point represents inefficient usage of resources and that the output is not the maximum possible one. There is unemployment of resources.

Main problem faced: unemployment of resources.

What can cause a parallel shift (inwards and outwards) of a PPC?

What does a non-parallel shift represent?

A parallel shift happens is when something affects the production of both goods in consideration in the PPC. A shift outwards might indicate a greater availability of resources or general improvement in technology. A shift inwards might indicate a regression of technology or reducion in resource availability.

A non-parallel shift happens when only the production of one of the goods in question is affected.

What are economic goods?

Stuf that are scarce, which will incur an opportunity cost

What are free goods?

Goods that are not scarce (freely available), like air, and do not incur an opportunity cost

What are the 3 criteria that private goods must satisfy?

Excludability (owner can chose who to allow access to it)

Rivalrous (when consumed it cannot be consumed by another) (it depletes)

Rejectability (a person who doesnt want it can not have it

What are the 3 criteria for public goods?

Non-excludability (cannot exclude (NON PAYERS)

Non-rivalrous

Non rejectability

Eg national security: the government cannot exclude citizens from being protected by the military, the amount of people being protected by it does not affect it’s benefit to the citizens, and citizens cannot opt-out of it.

roads might be classified as semi publivc because congestion sort-of makes it rivalrous.

Public healthcare and education are not public goods bc they are rivalrous and excludable, and rejectable to an extent

What are merit goods?

Merit goods are goods deemed:

1) Underconsumed in a free market

2) Beneficial, causes +ve externalities

3) Benefits are UNDER estimated

It is the result of consumers having imperfect information.

What are demerit goods?

Demerit goods are goods deemed:

1) overconsumed in a free market

2) not beneficial, causes -ve externalities

3) Benefits are OVER estimated

It is the result of consumers having imperfect information.

What is the factor endowment of a country?

The quantity and quality of factors of production at the country’s disposal