Basic Economic Ideas and Resource Allocation

CIE

Scarcity

When there are limited resources and unlimited wants, leading to the need for choices due to the imbalance between wants and resources.

Opportunity Cost

The next best alternative foregone when a choice is made, highlighting the cost of choosing one option over another.

Ceteris Paribus

The assumption that all other factors remain constant except the one being studied, allowing for a focused analysis of the impact of a single variable.

Short-Run

A time period where at least one factor of production can be changed, typically focusing on labor as the variable factor.

Long-Run

A time period where all factors of production are variable, emphasizing changes in capital or land inputs.

Factors of Production

Resources like land, labor, capital, and enterprise used to produce goods and services to meet human needs and wants.

Division of Labor

Breaking tasks into smaller components to increase specialization, productivity, and efficiency in the production process.

Market Economy

An economic system where decisions are made through the market mechanism, with resources owned by individuals and allocation driven by supply and demand forces.

Planned Economy

An economic system where resources are state-owned and allocated by the government, focusing on central planning and control of production.

Mixed Economy

An economic system combining elements of both market forces and government intervention in resource allocation decisions, involving both private and public sectors.

Inflation

Prices become volatile, potentially higher than in a Planned Economy

Industrial Unrest

Trade Unions may exploit authority for higher wages, leading to strikes

International Trade Side Effects

May cause BOP imbalances, resulting in current account deficits

Unemployment

Can stem from workers struggling with structural changes, common in planned economies

Fall in Output

Industries may decline with market forces introduction, causing output decrease

Reduction in Welfare Services

Market forces taking over welfare provision can lower living standards

Production Possibility Curves

Show maximum output from resources and technology for 2 products

Reasons for a shift in PPC

Economic growth, resource discovery, labor supply increase, etc.

Classification of Goods and Services

Categorizes goods into Free, Private, Public, Quasi-public, Merit, and Demerit

Free Goods

Unlimited supply, zero opportunity cost, no production factors needed

Private Goods

Excludable and rival, consumption affects availability for others

Public Goods

Non-excludable, non-rival, provided by government for national development

Free Riders

Benefit from public goods without contributing, due to non-excludability

Quasi-public Goods

Share characteristics of public goods but not all, like privately owned beaches

Merit Goods

Highly desirable for citizens' welfare, underproduced in market economy

Demerit Goods

Undesirable for citizens' welfare, overproduced due to negative externalities