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What is the basic economic problem?

Scarce finite resources and infinite wants.


What does a society have to decide as a result of the basic economic problem?

What goods to produce, how to make them and who should receive them.


What are the four factors of production?

Land, labour, capital and entrepreneurship.


What does land entitle?

All natural resources such as land, minerals, rivers, oil and the sea.


What does labour entitle?

The quantity and quality of people available for work.


What does capital entitle?

Anything made for the purpose of further production such as tools, machines and factories.


What does entrepreneurship entitle?

It is entrepreneurs who take risks in the pursuit of profit.


What is the definition of opportunity cost?

The cost of the next best forgone alternative.


What does the PPC show?

It shows all the maximum combinations of two goods that an economy can produce with a given set of resources.


Why is a point outside the PPC completely unattainable unless what occurs?

A point outside the PPC is unattainable due to scarcity unless the PPC were to shift outwards.


Why is a point inside the frontier wasteful?

Not all the resources are being used which is inefficient.


What is the opportunity cost of moving onto the frontier?

The opportunity cost of producing more of either good is zero as nothing has to be forgone in order to produce more.


Why does technology allow for the PPC to shift outwards?

It allows us to make more goods with the same set of resources.


What happens to the PPC if there is a technological advance in one industry alone?

The PPC pivots outwards rather than moving parallel to the old PPC.


What is another factor (other than technology) that can push the PPC outward?

The discovery of new resources.


What can PPC's be used to show the concept of?

Opportunity cost (as well as scarcity and choice).


What is referred to as constant returns?

Giving up constant amounts of resources in one industry and getting constant amounts of resources used in another industry in return.


What does a straight-line PPC show?

A constant opportunity cost.


Why is a curved PPC more realistic?

Resources can't be switched between industries with perfect ease in real life.


What yields diminishing returns?

The returns we get from switching resources get lower and lower.


What are some examples of natural advantages that a country might have that allows them to specialise in the production of something?

Climate, raw materials, cheap labour, skills or technology.


What are the advantages of specialisation?

Total output of goods and services is raised, quality can be improved, more wants and needs may be satisfied (due to a higher output at a lower cost), consumers have improved access to to a greater variety of higher quality products, it increases the size of the market and increases competition.


Why is competition good?

It helps to keep prices down and it maintains low inflation.


What are the disadvantages of specialisation?

It may eventually reduce efficiency and increase unit costs as unrewarding and repetitive work lowers worker motivation and productivity, workers begin to take less pride in their work and quality suffers, some workers receive narrow training and may not be able to find an alternative job (structural unemployment), mass-produced standardised goods tend to lack variety and if one machine breaks down then the entire factory stops.


What is an economic system?

A particular set of social institutions which deals with the production, distribution and consumption of goods and services in a particular society.


What is a market economy?

Individuals own private property, consumers are free to choose what products they buy and privately owned firms compete against each other to make goods for profit.


What is a planned economy?

The state owns the factors of production and all the decisions of what, how and for whom are made by the government.


What is a mixed economy?

An economy which adopts a mixture of the two systems.


What has trade and technology allowed us to do?

Make and consume more goods.


What is the price system?

When prices are determined by the interaction of supply and demand.