Economics: Allocation

Dismal Science

T.R.Malthus:

A prediction that the population would always grow faster than food - therefore humanity would never escape poverty.

Circular Flow Model

A visual model of the economy that shows how capital flow through markets among households and firms.

Production possibilities frontier (PPF)

Shows the maximum possible output combinations of goods/services an economy can achieve when all its resources are completely and efficiently employed (ceteris paribus).

Product efficiency

The point where highest production output is achieved at the lowest possible cost of the combination of inputs.

(Point A, B & C)

Opportunity cost

The highest-valued alternative forgone.

what is sacrificed / what is gained

Allocative efficiency

The point where the distribution of goods & services produced match consumer preferences.

- Social welfare is maximised

Marginal cost

The opportunity cost of producing one more unit.

Δ total cost / Δ quantity

Marginal benefit

The benefit received from consuming one more unit.

Δ total benefit / Δ quantity

Pareto efficiency

The point where it is impossible to make one party better off without making another worse off.

Economic growth

The expansion of production possibilities.

- Increases standard of living

- Does not decrease scarcity

- Does not avoid opportunity costs

Causes PPF curve to pivot

Technological change

The development of new goods/services and better methods of productions.

Capital accumulation

Growth of capital resources.

Gains from trade

Businesses have the choice of producing a variety of goods/services or specialise in only producing one.

Comparative advantage

When someone performs an activity at a lower opportunity cost to another.

- Arise from differences in individual abilities & characteristics of other resources

Absolute advantage

When someone is more productive than another.

Scarcity & wants

There is not an infinite number of resources, so it must be decided how best to distribute what is available.

Resource allocation method: market price

People who are willing and able to pay and receive the resource.

Resource allocation method: command system

Allocates resources by order of authority.

Resource allocation method: majority rule

Allocates resources via a majority vote.

Resource allocation method: contest

Allocates resources to a winner.

Resource allocation method: first-come, first served

Allocates resources to those first in a queue.

Resource allocation method: lottery

Allocates resources to those who pick the winning number - based on luck.

Resource allocation method: personal characteristics

Allocating resources based on the characteristics of individuals.

Resource allocation method: force

The most powerful force controls allocation.

Indifference curve

Shows all combinations of goods that provide the consumer with the same utility.

Budget constraint

The limited amount of income available to consumers to spend on goods and services.

Nominal income

The amount of money income received in a given time period, measured in current pounds.

Real income

The amount of goods and services that can be purchased with nominal income during some period of time; nominal income adjusted for inflation.

The Law of Transitivity

If a relation holds between a first and second object, then a relation also holds between the second and third object

Crossing of indifference curves

Indifference curves cannot cross:

- Intersection would force a point to be on both a higher and lower utility curve simultaneously

- The Law of Transitivity

Marginal Rate of Substitution (MRS)

The rate at which a consumer would be willing to trade off one good for another.

Law of diminishing marginal utility

The principle that consumers experience diminishing additional satisfaction as they consume more of a good/service during a given period of time.