Econs - Central Problem of Economics

Production Possibility Curve

Shows all maximum attainable combinations of 2 goods a country can produce within a specified time period with all its resources fully and efficiently employed, at a given state of technology

A positive statement is a statement of ___

Fact

A normative statement is a statement of ___ or ___

Value, opinion

Scarcity

Limited resources and unlimited wants

Factors of production (FOPs)

Capital, entrepreneurship, land, labour

opportunity cost

The expected benefits from the next best alternative that is forgone when making a decision

Explicit costs

Require a direct money payment

Implicit costs

The value of anything other than the direct payment that is sacrificed when a decision is made

Marginal benefit (MB)

Additional benefit derived from undertaking an additional unit of an activity

Marginal cost (MC)

Additional (opportunity) cost incurred when undertaking a additional unit of an activity

Marginalist principle

• If MB exceeds MC → rational to undertake

• If MC exceeds MB → rational to not undertake

Marginal utility

Customer: additional satisfaction gained from consuming one extra unit of the good within a given periodd of time

Law of diminishing marginal utility (LDMU)

As the quantity of a good consumed increases, the MU falls

Rational consumer’s objective is to maximise ___

Utility

• consumer will consume quantities of a good up to point where MU≥ price, where MY diminishes with additional units of a good consumed due to LDMU

Marginal revenue

Producers: additional revenue receives from selling additional unit of the good

Law of diminishing marginal returns

When increasing amounts of a variable factor of production are used with a given amt of a fixed factor, there will come a point when each extra unit of the variable factor will produce less output than the previous unit

Three key economic questions

• what and how much to produce?

• How to produce?

• For whom to produce?

Three main economic systems

• free market

• Planned/command

• Mixed