cpe Flashcards
(23 cards)
what is and what gives rise to the central economic problem?
the limitation of resources (factors of production) and the existence of unlimited wants leads us to the central economic problem - scarcity
what are positive and normative economics?
positive economics focus on facts and cause-and-effect relationships, they are value free (objective economics) and can true or false
normative economics value judgements (opinions)
what are the factors of production?
CELL
Capital
Entrepreneurship
Land
Labour
what are capital goods and what are consumer goods
capital goods are goods that can produce other goods in the future (factories, machinery etc)
consumer goods are goods to be consumed
what does scarcity imply?
scarcity implies that choices have to be made in the allocation of resources between different uses
when choices are made, trade-offs and opportunity costs are incurred
what is the definition of opportunity cost?
opportunity cost refers to the net benefit that could have been derived from the next best alternative forgone when a choice is made.
what are the 3 basic economic problems?
what and how much to produce?
how to produce?
for whom to produce?
what’s the definition of PPC?
The production possibility curve (PPC) shows all combinations of the maximum quantities of 2 goods that can be produced by an economy with a given amount of resources fully and efficiently employed at a given state of technology in a given time period
its a useful tool when explaining the concepts of scarcity, choice, trade-offs and opportunity cost
how is scarcity illustrated by the ppc?
scarcity is indicated by the unattainable combinations outside the boundary of the curve, where the country currently does not have the necessary resources / level of technology needed to produce that combination of capital goods and consumer goods
how is choice illustrated by the ppc?
choice is illustrated by the need to choose among the alternative attainable combinations along the curve
what is the definition of productive efficiency?
productive efficiency is defined as the situation when all the available resources in an economy are fully and efficiently employed to achieve the maximum output possible
to increase the output, increase FOPs
what is the definition of allocative efficiency?
allocative efficiency is defined as the allocation of resources to produce the combination of goods and services most wanted by society
only one point on the PPC is allocatively efficient
why is the opportunity cost in a PPC increasing?
- factors of production are not homogenous
- as more and more units of capital goods are produced,
- more factors of production that are better suited to consumer goods production
- but poorly suited to capital goods production
- must be allocated to produce more capital goods
what are the 3 different economic agents and what are their aims?
consumers - aim to maximise utility (satisfaction derived from a good)
producers - aim to maximise profit
government - aim to maximise welfare
why do the 3 economic agents make different decisions?
they are motivated by self-interest, meaning that they would want to make the decision that would provide the greatest benefit based on their aim, relative to the cost
what is the marginalist principle?
the marginalist principle states that when economic agents make rational decisions, they do so by considering the marginal cost and marginal benefit of that decision
when is a decision optimal according to the marginalist principle?
when marginal benefit = marginal cost (MB = MC)
according to the marginalist principle, when is it rational for consumers to consume more of a good/service?
when marginal private benefit > marginal private cost (MPB > MPC)
according to the marginalist principle, when is it rational for producers to produce and sell an additional unit of good/service?
when marginal revenue > marginal cost (MR > MC)
according to the marginalist principle, when is it rational for governments to build infrastructure?
when marginal social benefit > marginal social cost (MSB > MSC)
what is marginal benefit and what is marginal cost?
marginal benefit = ADDITIONAL benefit derived from an ADDITIONAL unit of ____
marginal cost = ADDITIONAL cost incurred from an ADDITIONAL unit of ____
what are the considerations in the decision-making approach? (during, impact and iteration)
CCBIP
Constraints
Costs & Benefits
Information
Perspectives
Impact: intended & unintended consequences
Iteration: Changes
