Basic Economic Ideas and Resource Allocation – Lecture Review

These flashcards cover key terms, definitions, and analytical concepts from the lecture on basic economic ideas, scarcity, opportunity cost, production possibilities, types of goods, and different economic systems.

What core economic problem arises because resources are limited while wants are unlimited?

Scarcity.

Why must individuals, firms, and governments make economic choices?

Because scarcity forces them to choose between competing alternatives, creating trade-offs.

Define opportunity cost.

The value of the next best alternative foregone when a choice is made.

In Samuelson’s framework, what are the three basic economic questions every society must answer?

What to produce, how to produce, and for whom to produce.

Why is economics classified as a social science?

It studies human behavior in the production, distribution, and consumption of goods and services.

Distinguish between positive and normative statements in economics.

Positive statements describe what is, was, or will be and can be tested; normative statements express opinions about what ought to be and involve value judgements.

What does the assumption ‘ceteris paribus’ mean?

All other influencing factors are held constant while examining the relationship between two variables.

How is the short run defined in production analysis?

A period in which at least one factor of production is fixed.

What distinguishes the long run from the short run?

In the long run all factors of production are variable.

What additional flexibility is allowed in the very long run?

Technological change and expansion of firm size.

List the four traditional factors of production and the income each earns.

Land (rent), labour (wages), capital (interest), and enterprise/entrepreneurship (profits).

Give two examples of renewable natural resources.

Water and solar energy.

Give two examples of non-renewable natural resources.

Oil and natural gas.

What is human capital?

The knowledge, skills, abilities, and values embodied in workers.

Name two key differences between physical capital and human capital.

Physical capital is tangible and can be bought or sold; human capital is intangible and inseparable from its owner.

What is meant by division of labour?

Splitting a production process into separate tasks so specialised factors perform each sub-task.

How does division of labour lead to specialisation?

Workers focus on the task they perform best, increasing efficiency and output.

Why is the entrepreneur often called a risk-taker?

Because they invest capital and organise other factors in pursuit of profit under uncertainty.

State two contemporary functions of entrepreneurs besides risk-taking.

Adopting new technology (e.g., robots) and integrating sustainability into production.

What does a Production Possibility Curve (PPC) illustrate?

The maximum attainable combinations of two goods an economy can produce with given resources and technology.

List two standard assumptions made when drawing a PPC.

Resources are fixed but transferable, and technology is constant.

Why is a typical PPC concave to the origin?

Because opportunity cost increases as more of one good is produced.

What does a linear PPC imply about opportunity cost?

Opportunity cost is constant between the two goods.

Give one cause of a rightward shift of the PPC.

Technological progress or an increase in the labour force.

What does a point inside the PPC indicate?

Productive inefficiency or unemployment of resources.

Explain the term ‘Pareto improvement’ in the PPC context.

Moving from an inefficient point inside the PPC to another inside point where at least one good’s output rises without reducing the other.

Define a private good and name its two main characteristics.

A good produced for sale with excludability and rivalry.

What two characteristics define a pure public good?

Non-excludability and non-rivalry.

What problem makes markets fail to supply public goods?

The free rider problem.

What are merit goods and why are they under-consumed in a free market?

Beneficial goods with positive externalities; consumers underestimate their true benefits due to information failure.

Why are demerit goods over-consumed in free markets?

Producers and consumers ignore or underestimate the negative externalities and costs.

How are resources allocated in a free-market economy?

Through the price mechanism (market forces of demand and supply).

State one advantage and one disadvantage of a free-market system.

Advantage: Greater efficiency and innovation. Disadvantage: Market failures such as inequality and externalities.

What is a centrally planned economy?

An economy where most resources are owned and allocated by the government aiming at social welfare.

Give one advantage and one disadvantage of a centrally planned system.

Advantage: Greater income equality. Disadvantage: Lack of incentives leading to inefficiency.

Define a mixed economic system.

A system where resources are partly allocated by markets and partly by government directives.

List two reasons a mixed economy can better handle market failures.

Government provision of public goods and subsidies/taxes to correct externalities.

What is meant by a transitional economy?

An economy shifting from central planning to a market-oriented system.

Name three common reforms in transitional economies.

Privatisation, price liberalisation, and labour market reforms.

Contrast the gradualist and radical approaches to economic reform.

Gradualist reforms occur slowly in stages; radical reforms are implemented quickly and extensively.

Give one potential benefit and one risk of a transitional economy.

Benefit: Greater efficiency and foreign investment. Risk: Short-term inflation and unemployment.

What type of efficiency is achieved when an economy operates anywhere on its PPC?

Productive efficiency.

Why does operating at a point favouring consumer goods (on a PPC) raise current living standards but may lower future ones?

Because resources devoted to consumer goods reduce capital goods production, limiting future growth.

Which factor income is termed ‘interest’ and why?

Capital earns interest because it represents the payment for using physical or financial capital over time.

State two key features of labour as a factor of production.

It is heterogeneous and perishable (cannot be stored for future use).

What is the marginal rate of transformation (MRT) on a PPC?

The rate at which one good must be sacrificed to produce an additional unit of another good.

How can a PPC pivot rather than shift outward entirely?

Through technological improvement in only one sector, increasing maximum output for that good while the other remains unchanged.