Econs theme 1

The central economic problem

Scarcity

Scarcity is the central economic problem where limited resourced are insufficient to fulfill unlimited wants

Choice

Due to scarcity, economic agents need to make choices on allocating resources for production or consumption. Decisions involve which unlimited wants to satisfy and which to sacrifice, based on maximising self-interest

Opportunity cost

opportunity cost is the value of the next best alternative forgone. When choices are made, opportunity costs are incurred as the production or consumption of goods or services are forgone

Four factors of production

Land: Natural resources like forests, mineral deposits and crude oil

Labour: Human resources determined mainly by the size of the working population

Capital: Man-made resources used for futher production, like tooks and assembly plants

Entrepreneurship: Resource that organises the three other factors of production and bears the risks of production, such as financial loses

Production Possibility Curve (PPC)

A graphical representation that shows the maximum possible output combinations of two goods or services, assuming full and efficient utilisation of resources, that can be produced given the a fixed quantity of resources and level of technology.

Using the PPC to illustrate Scarcity, Choice and Opportunity Cost

A downward-sloping PPC illustrates scarcity, choice, and opportunity cost. Scarcity is shown as an economy cannot produce outside of its PPC due to limited resources, making the points outside the PPC unattainable. Choice is represented as due to scarcity, economies must choose a combination of goods to maximise society’s welfare. The PPC is downward sloping because producing more of one good means producing less of another

Point Inside the PPC

It is an attainable output however, it does not achieve maximum possible production. Points inside the PPC are productively insufficient due to unemployment or underemployment of resources

Point on the PPC

Attainable output. Maximum possible production of full employment. While all points on the PPC are productively efficient only one point on the PPC is allocatively efficient

Point outside the PPC

Unattainable output. Unattainable due to limited resources. scarcity/constant technology

Factors that shift the PPC

The economy can shift the PPC outwards through: Increase in quantity of factors of production, increase in quality or productivity of factors of production, improvement in state of technology

Trade off between consumption and investment

Economies must choose between producing consumer goods and capital goods. Consumer goods are bought for immediate consumption. Capital goods are used to produce other goods, increasing the economy’s productive capacity. Producing more of one good results in a higher current standard of living but a lower future standard of living. Producing more capital goods result in a lower current standard of living but a rise in future standard of living

Marginalist principal

Economic agents make decisions by weighing the marginal benefit and marginal cost of small changes in their favour. Things are desirable if the marginal benefit is more than the marginal cost