Business Economics Topic 1: The Central Economic Problem

Flashcards covering the central economic problem, factors of production, and the Production Possibility Frontier (PPF) based on the Business Economics Topic 1 lecture notes.

What is the definition of Economics according to the transcript?

Economics is the study of how people, firms and societies choose to allocate their scarce (i.e. limited) resources to satisfy some of their unlimited wants.

How is Microeconomics defined?

Microeconomics is the study of the choices that individuals and business make, the way these choices interact and how the government can exert influence on them.

What is the focus of Macroeconomics?

Macroeconomics is the study of the performance of the national and the global economy.

What is the definition of scarcity?

Scarcity is the condition in which our wants (for goods) are greater than the limited resources available to satisfy those wants.

What is the distinction between needs and wants?

Needs are things that we must have to survive, while wants are things that we would like to have but which are not necessary for our immediate physical survival.

How is opportunity cost defined?

Opportunity cost is the next best alternative foregone when an economic decision is made.

If a consumer ranks their choices as (1) Tablet, (2) Mobile phone, and (3) Laptop, what is the opportunity cost of choosing the tablet?

The opportunity cost is the mobile phone only, as it is the next best alternative foregone.

Name the four main categories of factors of production.

1. Land, 2. Labour, 3. Capital, and 4. Entrepreneurship.

In the context of factors of production, what does 'Land' include?

Land includes natural resources such as minerals, forests and water, including both renewable and non-renewable resources like fossil fuels.

What is the difference between human capital and physical capital?

Human capital refers to the knowledge and skill people obtain through education and training, while physical capital refers to man-made resources such as factories, machinery, tools, and buildings.

What is the role of entrepreneurship as a factor of production?

Entrepreneurship is the human resource that organises land, labour, and capital to produce goods, seek new business opportunities, and bear the risks of business decisions.

What does the Production Possibility Frontier (PPF) show?

The PPF shows the maximum combinations of goods and services that can be produced by an economy in a given period, if all resources are being used fully and efficiently and the state of technology is fixed.

What is indicated by a point located inside the Production Possibility Frontier (Point E)?

A point inside the PPF indicates that not all factors of production are being used efficiently, a situation known as under-employment, under-utilisation, or unemployment of resources.

Why is a point outside the Production Possibility Frontier (Point F) described as unattainable?

It is unattainable because the economy lacks sufficient resources or technology to produce that combination of goods and services.

What type of opportunity cost is illustrated by a concave PPF?

Increasing opportunity cost, where larger and larger quantities of one good must be sacrificed as more of the other good is produced.

What type of opportunity cost is illustrated by a straight-line PPF?

Constant opportunity cost, where the same quantities of one good are sacrificed to produce more of another good.

How is economic growth defined in relation to the PPF?

Economic growth is the expansion of the economy’s production possibilities, resulting in an outward shift of the PPF.

What effect does a technological advancement affecting only vegetable production have on the PPF?

It causes a rotation outwards of the PPF along the axis representing vegetables, while the intercept for the other good (e.g., bubble tea) remains the same.