Topic 1: basic economic ideas and resource allocation

what is the economic problem

scarcity: unlimited wants with finite resources, insufficient resources to produce goods and services

what is opportunity cost

the next best alternative forgone when a decision is made

what is capital and its reward

man-made resources needed in the production process

interest

what is enterprise and its reward

someone who is able to take risks and has the knowledge and ability required to combine the factors of production

profit

what is labour and its reward

human resources needed in the production process

wages

what is land and its reward

natural resources needed in the production process

rent

what are the basic economic questions

what to produce?

how to produce?

for whom to produce?

what does a production possibility curve show

the maximum possible total output that can be produced in the economy given all the resources are being used efficiently

what do points inside the PPC mean

resources are not being fully used up, the economy is not operating at its most efficient

what do points on the PPC curve mean

all resources are fully used up, the economy is at its most efficient

what do points outside the PPC mean

not attainable, insufficient resources in the economy

what do points moving along the curve on the PPC demonstrate

opportunity cost

what are the causes for an inward shift in the PPC

a decrease in the quantity of factors of production, decrease in the quality of factors of production

what are the causes for an outward shift in the PPC

an increase in quantity of factors of production, an increase in the quality of factors of production

what is a pivotal shift on a PPC

when one point stays the same but the other point increases or decreases, due to an increase/decrease in the quality or quantity of FoP for only one type of good

what does a straight line PPC show + reasons for

constant opportunity cost for every point

homogenous resources

what does an inwards bending PPC show + reasons for

decreasing opportunity cost when moving down the curve

non-homogenous resources, more efficient as moving down the curve

what does an outwards bending PPC show + reasons for

increasing opportunity cost when moving down the curve

non-homogenous resources, less efficient as moving down the curve

what are economic goods

anything that requires resources to product, eg. public/private goods, opportunity cost is involved

what are free goods

no resources are required to produce, no opportunity cost is required, eg. sunlight, air

what are public goods + examples

1. non-excludable: cannot pay to own it, cannot own it privately, cannot be limited to one person

2. non-rivalrous: when one person uses them it does not decrease the amount available for others

3. non-rejectable: cannot say no to using

eg. street lighting, lighthouses, national defense

what are private goods + examples

1. excludable: pay to own it, privately can own it, can prevent others from using it

2. rivalrous: competition with others to own

3. rejectable: can say no

eg. food, clothing, houses etc.

what are quasi public goods + example

carry the characteristics of public + private goods and can switch between

eg. roads with tolls —> have to pay to use it

what can private goods be divided into

merit goods and demerit goods

what are merit goods

under-consumed, under-produced, positive externalities (spill over effect to the third party in a good manner), benefits are underestimated

what are demerit goods

over-consumed, over-produced, negative externalities (spill over effect to the third party in a bad manner), cost is under-estimated