CH1: Introduction to Economics Flashcards
(32 cards)
What is economics and why does it matter?
Economics is the social science that studies the choices individuals, businesses, and governments make to allocate scarce resources. It matters because scarcity forces trade-offs—decisions about how to best use limited time, money, and materials to satisfy unlimited wants.
What is scarcity, and how is it different from poverty?
Scarcity means resources are limited relative to wants—it affects everyone, including the wealthy. Poverty, in contrast, refers to the inability to meet basic needs. Scarcity is a universal economic condition”;” poverty is a social one.
What are needs vs wants in economic terms?
Needs are essential for survival (food, water, shelter)”;” wants are non-essential desires (luxuries, entertainment). Economics helps societies decide how to prioritize resource allocation between the two.
What is opportunity cost, and why is it central to economic decision-making?
Opportunity cost is the value of the next best alternative foregone when a choice is made. It reflects the real cost of decisions, ensuring individuals and societies make efficient trade-offs.
Define the four factors of production and their rewards.
Land: Natural resources (e.g. oil, land) → Reward: Rent” Labour: Human effort → Reward: Wages Capital: Man-made tools & machines → Reward: Interest
Entrepreneurship: Risk-taking
coordination → Reward: Profit
What is the production possibilities curve (PPC) and what does it show?
The PPC is a graph that shows all possible combinations of two goods an economy can produce using all resources efficiently. It illustrates scarcity (limits), choice (various points), and opportunity cost (trade-offs between goods).
Why is the PPC bowed outward?
Due to increasing opportunity cost. As more of one good is produced, increasingly larger amounts of the other must be sacrificed because resources are not equally efficient in all uses.
What do points on, inside, and outside the PPC indicate?
On: Efficient production” Inside: Inefficiency (underutilization of resources) “Outside: Unattainable with current resources and technology
How can the PPC shift outward and what does that represent?
Outward shift = Economic growth, caused by more resources (e.g. labour, capital), improved technology, or better education/training.
Differentiate between microeconomics and macroeconomics.
Microeconomics: Individual decision-making (e.g., households, firms) and market dynamics.
Macroeconomics: Economy-wide phenomena like inflation
unemployment, GDP, and policy.
What is the circular flow of economic activity?
A model showing interactions between households (supply factors, demand goods) and firms (supply goods, demand factors). It illustrates how money, goods, and services flow in the economy.
What does the concept of trade-offs imply in economics?
Choosing one option means sacrificing another. Every choice involves a cost—highlighted by the PPC and the concept of opportunity cost.
How does economic growth impact the PPC and society?
Growth shifts the PPC outward, allowing more goods to be produced and increasing the standard of living over time.
Explain with an example how opportunity cost applies in daily decisions.
If you choose to study instead of going to a party, the opportunity cost is the enjoyment/social time you gave up. If a factory makes trucks instead of cars, the cars forgone are the opportunity cost.
Why can’t societies produce unlimited goods and services?
Because of finite resources (labour, capital, land). This fundamental constraint leads to the need for prioritization and efficient decision-making—core to the study of economics.
What role do incentives play in economic behaviour?
Incentives influence choices by altering perceived benefits or costs. E.g., tax breaks can encourage investment”;” higher prices may reduce consumption.
What is the significance of the PPC in understanding efficiency?
It identifies when an economy is fully utilizing its resources (on the curve), underperforming (inside the curve), or pursuing growth (shifting the curve outward).
Can a society avoid opportunity costs? Why or why not?
No. Since resources are limited, every decision implies sacrificing alternatives. Opportunity cost is unavoidable and inherent in all economic activity.
How is economic efficiency defined?
Achieving maximum output from limited inputs, or producing goods and services at the lowest possible cost without waste.
What causes inefficiency in an economy?
Factors like unemployment, poor resource allocation, outdated technology, or political instability can prevent an economy from operating on its PPC.
What does the national-level Production Possibilities Frontier (PPF) illustrate?
It shows the trade-offs and opportunity costs a country faces when allocating scarce resources between two goods. Points on the curve reflect efficiency; a point inside the curve indicates inefficiency; a point outside is unattainable with current resources.;
