THE basic economic problem and Production Possibility Curves

Flashcards covering the basic economic problem, factors of production, opportunity cost, and the Production Possibility Curve (PPC) based on lecture notes.

What is the basic economic problem?

The problem is that people have infinite wants that exceed the world's finite resources.

How is the term "scarcity" defined in economics?

A situation where there isn't enough to satisfy everyone's wants.

What are the characteristics of an ECONOMIC GOOD?

Products that require resources to be produced, have an opportunity cost, are bought and sold in a market, are available in a limited supply, are rivalrous (consumption by one reduces availability for others), and furnish private ownership rights.

What are the characteristics of FREE GOODS?

Those that don't require resources to produce, have no opportunity cost, are abundant, require no payment, are available in an unlimited supply, are non-rivalrous, and cannot be owned by private individuals.

Distinguish between "needs" and "wants".

NEEDS are goods that are essential for survival, while WANTS are goods that aren't necessary for survival but are demanded by economic agents to fulfill their desires.

Who are the three ECONOMIC AGENTS?

1. Consumers (individuals households), 2. Firms (businesses that operate in the private sector of the economy), and 3. The government (the public sector of an economy).

What are the three fundamental ECONOMIC QUESTIONS?

1. What to produce? 2. How to produce it? 3. For whom to produce?

List the four FACTORS OF PRODUCTION (FOP) and their rewards.

1. LAND: natural resources (rewarded with rent); 2. LABOUR: human resources (rewarded with wages); 3. CAPITAL: manufactured resources (rewarded with interest); 4. ENTERPRISE: business skills to combine resources (rewarded with profits).

Define CAPITAL GOODS and CONSUMER GOODS.

CAPITAL GOODS are goods used to make consumer goods (machinery, tools, etc.). CONSUMER GOODS are final goods categorized as durable or non-durable.

What is the definition of OPPORTUNITY COST?

The cost forgone of the next best alternative when making a decision.

What does a PRODUCTION POSSIBILITY CURVE (PPC) show?

The maximum combination of any 2 products that can be produced in an economy at a particular point in time if all its resources are used efficiently.

Why is the PPC usually bow-shaped?

Because of increasing opportunity cost.

What does a point beyond (outside) the PPC curve represent?

A combination of goods that is currently unattainable due to the economy's scarce resources.

What does a point inside the PPC curve represent?

Inefficiency, meaning not all resources are being used effectively.

List factors that cause a PPC to SHIFT OUTWARDS.

An increase in the number of workers, an increase in skills and training, discovery of new resources, new machinery or processes, making use of previously unused resources, acquisition of new land, and advancements in technology.

List factors that cause a PPC to SHIFT INWARDS.

A decrease in the quantity of resources (depleted or destroyed) and a decrease in the quality of resources (overuse).

What does a linear PPC indicate on a graph?

There is equal opportunity cost at all points on the graph.

What two conditions are required for a country to be operating ON the PPC?

1. All resources are used (no unemployment in FOP) and 2. There is efficiency in the use of resources (allocated to their best use).