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interdependence
the idea that economic decision-makers interact with and depend on one another: no one is self-sufficient
economic wellbeing
overall levels of prosperity, economic satisfaction, and living standards for the members of a society
scarcity
limited resources are insufficient to satisfy unlimited human wants and needs; factors of production are finite while wants are infinite
choice
decisions made facing the problem of scarcity, producing opportunity costs
efficiency
output: input; maximising output from scarce resources to avoid waste
sustainability
using resources to satisfy current needs without compromising future generations' ability to satisfy their needs
intervention
actions taken by a government to influence or regulate economic activities when markets cannot achieve societal goals by themselves
microeconomics
study of the economic behaviour of individual decision-making entities
macroeconomics
study of the economy as a whole: aggregates of individual decision-making entities
factors of production
resources that are used to make all goods and services
what are the 4 factors of production?
land/natural, labour, capital, entrepreneurship
What are the factor incomes for each of the FOPs
land: rent
labour: wages
capital: interest
entrepreneurship: profit
goods
physical objects that people need and want
services
non-physical activities that people need and want
land resources
all natural resources
labour resources
physical and mental effort that people contribute to the production of goods and services
physical capital
man-made objects used to produce goods and services
entrepreneurship
the people that innovate, take risks, seek opportunities, and run businesses to profit
human capital
skills, abilities, and knowledge acquired by people
3 main questions in economics
What to produce? How to produce? For whom to produce?
Opportunity cost
value of the next best alternative forfeited whenever a choice is made
Economic profit =
revenue - (explicit costs + implicit costs)
implicit cost
opportunity cost
free goods
Goods that are unlimited in supply and which have no opportunity cost
economic goods
goods that are scarce, for which the quantity demanded exceeds the quantity supplied at a zero price
production possibility frontier (PPF)
a curve that shows the maximum combinations of two goods or services an economy can produce given its resources, assuming all resources are fully and efficiently utilised.
Productive/technical efficiency
when goods and services are produced at the lowest possible cost while using all available resources efficiently
What 2 conditions must be met to achieve productive efficiency?
Resources are fully employed
Resources are used efficiently with waste minimised
Allocative efficiency
When the combination of goods and services produced is optimum for society's wants and needs, hence maximising society's welfare and minimising resource waste
Productive capacity
the maximum output that an economy can produce with available resources
Why might the PPF expand outwards? (this does not mean that there is actual growth)
Higher quantity of resources (natural, labour, capital)
Increased efficiency (higher resource quality/tech improvement)
What are points inside the PPF?
inefficient use of resources or underemployment of productive capacity
Dynamic efficiency
an economy's ability to change its resource allocation over time according to society's needs and wants
Why is no economy ever likely to produce on the PPF?
Productive inefficiency
Underemployment of resources
PPF relationship with scarcity
Resources and tech are scarce
Economy must make choices
Choices have opportunity costs
How can a country consume at a point outside the PPF?
Through specialisation (due to comparative advantage) and trade
What 3 shapes can the PPF take and what are the implications?
Concave: increasing opportunity cost
Constant slope: constant opportunity cost + perfectly adaptable resources
Convex: decreasing opportunity cost
Positive economics
the branch of economic analysis that describes, explains, and predicts the way the economy actually works (may be false)
Normative economics
The part of economics involving value judgments about what ought to happen (cannot be true nor false)
ceteris paribus
other variables are assumed to be constant and unchanging
theory
general explanation of interrelated events that can help make predictions
law
a descriptive statement with universal validity that reliably predicts events
model
A simplified representation illustrating key features of a theory or law
economic equality
the idea that each individual should receive the same amount of material goods, regardless of their contribution to society
equity
normative concept regarding the fair distribution of resources within a society, considering individual needs and circumstances
rational decision-making
using logic to maximise utility and satisfaction according to self-interest
