Introduction to Economics: The Economic Problem, Opportunity Cost, and Production Possibility Frontiers

A set of flashcards covering the key concepts from The Economic Problem, Opportunity Cost, Production Possibility Frontiers, and Positive vs Normative Economics as presented in the notes.

What is The Economic Problem?

Unlimited Wants plus Scarce Resources – Land, Labour, Capital – leading to choices about resource use.

Which resources are scarce in economics?

Land, Labour, Capital.

What three questions do economies answer about production?

What goods and services should an economy produce? How should goods and services be produced? Who should get the goods and services produced?

What is Opportunity Cost?

The cost expressed in terms of the next best alternative sacrificed.

What is a Production Possibility Frontier (PPF)?

A curve showing the different combinations of goods and services that can be produced with a given amount of resources.

What does a point inside the PPF indicate?

Resources are not being utilised efficiently.

What does a point outside the PPF indicate?

Not attainable with the current level of resources; requires growth or productivity improvements.

What does moving along the PPF illustrate about opportunity cost?

As you produce more of one good, you sacrifice some of the other; the opportunity cost is the forgone amount of the other good.

What are capital goods and what are consumer goods?

Capital goods are used to produce other goods; consumer goods are final goods for households.

In the PPF example, what is the opportunity cost of producing an extra X0–X1 consumer goods?

The capital goods foregone (Yo–Y1).

What causes the PPF to shift outward?

Expanding resources or improving the productivity of those resources.

What does production inside the PPF indicate about resource use?

The country is not using all its resources (under-utilisation).

What does the PPF illustrate about growth and opportunity cost?

Growth is shown by outward shifts; opportunity cost is shown by trade-offs along the curve.

What is a Positive Economic Statement?

Capable of being verified or refuted by resorting to fact or further investigation.

What is a Normative Economic Statement?

Contains a value judgement which cannot be verified by resort to investigation or research.

Give an example of a normative statement from the notes.

Society ought to provide homes for all.

Give an example of a positive statement from the notes.

Health care can be improved with more tax funding.