J1 H2 CPE Lecture 1 Notes

Question 1

What is the central economic problem?

Answer 1

Scarcity - limited resources available to satisfy unlimited wants.

Question 2

What are the essential questions in economics?

Answer 2

1. Why do we need to make decisions/choices? 2. How do we make decisions?

Question 3

What is the definition of Economics?

Answer 3

Economics is a social science that studies how individuals and societies tackle the problem of scarcity, having to allocate scarce resources among unlimited wants.

Question 4

What are the two main branches of economics?

Answer 4

1. Microeconomics - Studies the behavior of individuals and firms. 2. Macroeconomics - Studies the economy as a whole, focusing on aggregate indicators like GDP, inflation, and unemployment.

Question 5

Give an example of a microeconomic and macroeconomic issue.

Answer 5

• Microeconomics: Price of cars in Singapore.
• Macroeconomics: Singapore’s national GDP growth.

Question 7

What is Positive Economics?

Answer 7

Describes and explains economic phenomena based on facts and cause-and-effect relationships. Statements can be tested and verified.

Question 8

What is Normative Economics?

Answer 8

Expresses value judgments about what ought to be. Statements cannot be tested or proven.

Question 9

Give an example of a Positive Economic statement.

Answer 9

“An increase in household incomes will lead to an increase in the demand for luxury foods.”

Question 10

Give an example of a Normative Economic statement.

Answer 10

“The government should subsidize the production of cars.”

Question 11

What are the four Factors of Production (FOP)?

Answer 11

C.E.L.L - Capital, Entrepreneurship, Land, Labour

Question 12

What is Capital?

Answer 12

Man-made resources used for production (e.g., machinery, tools, buildings).

Question 13

What is Entrepreneurship?

Answer 13

Organizes and manages factors of production, takes risks, and innovates.

Question 14

What is Land?

Answer 14

Natural resources (e.g., oil, minerals, forests, arable land).

Question 15

What is Labour?

Answer 15

Human effort (physical and mental) used to produce goods and services.

Question 16

What are the factor payments for each Factor of Production?

Answer 16

• Land → Rent
• Labour → Wages
• Capital → Interest
• Entrepreneurship → Profits

Question 18

Why does scarcity exist?

Answer 18

Because resources are limited, but human wants are unlimited.

Question 19

What does scarcity lead to?

Answer 19

The need to make choices, leading to opportunity cost.

Question 20

What is Opportunity Cost?

Answer 20

The net benefit forgone from the next best alternative when a choice is made.

Question 21

What is the opportunity cost if a consumer buys a wagyu beef steak instead of a dress?

Answer 21

The net benefit that could have been gained from buying the dress.

Question 22

What is the opportunity cost of producing 100 mobile phones instead of 50 laptops?

Answer 22

The forgone revenue from producing the 50 laptops.

Question 23

What is the opportunity cost of building hospitals with $3 million?

Answer 23

The social welfare forgone from building more schools.

Question 24

What does the PPC illustrate?

Answer 24

Scarcity, Choice, and Opportunity Cost.

Question 25

What are the key assumptions of the PPC?

Answer 25

1. Only two goods are being produced. 2. Resources are fully and efficiently used. 3. Technology remains constant.

Question 26

What does a point inside the PPC represent?

Answer 26

Unemployment or under-utilization of resources.

Question 27

What does a point on the PPC represent?

Answer 27

Productive efficiency - the economy is using all resources efficiently.

Question 28

What does a point outside the PPC represent?

Answer 28

Unattainable production given current resources and technology.

Question 30

What causes an outward shift in the PPC?

Answer 30

1. Increase in quantity of resources (e.g., more land, labor, capital). 2. Improvement in quality of resources (e.g., education, training). 3. Technological advancements.

Question 31

What happens if a country prioritizes capital goods over consumer goods?

Answer 31

The PPC will expand faster in the future, leading to higher economic growth.

Question 32

What does a parallel outward shift of the PPC indicate?

Answer 32

Equal improvement in the production of both goods.

Question 33

What does a pivoted outward shift of the PPC indicate?

Answer 33

Improvement in one good's production more than the other (e.g., new farming technology increases food production but not capital goods).

Question 34

What is Actual Economic Growth?

Answer 34

The percentage increase in national output (GDP).

Question 35

What is Potential Economic Growth?

Answer 35

The percentage increase in an economy's productive capacity.

Question 36

How is Actual Economic Growth represented on the PPC?

Answer 36

A movement from a point inside the PPC to a point on the PPC.

Question 37

How is Potential Economic Growth represented on the PPC?

Answer 37

An outward shift of the PPC.

Question 39

What are the objectives of economic agents?

Answer 39

- Consumers → Maximize utility - Producers → Maximize profits - Governments → Maximize social welfare

Question 40

What are the key determinants in decision-making?

Answer 40

1. Objectives 2. Benefits & consequences 3. Costs & trade-offs 4. Constraints 5. Information 6. Perspectives (effects on others)

Question 41

What is the Marginalist Principle?

Answer 41

MB = MC - Decision-makers continue an activity until the marginal benefit equals the marginal cost.

Question 42

What is Productive Efficiency?

Answer 42

Productive efficiency is achieved when the maximum output is produced for a given amount of inputs, or a given output is produced at the least possible cost. Society is prod. Efficient at any point on the ppc. As all the available resources are being used to the fullest

Question 43

What is Allocative Efficiency?

Answer 43

Producing the combination of goods and services that maximizes society's welfare.

Question 45

What is the Marginalist Principle?

Answer 45

Rational decision-makers continue an activity until Marginal Benefit (MB) = Marginal Cost (MC).

Question 46

What is Marginal Benefit (MB)?

Answer 46

The additional benefit gained from consuming or producing one more unit of a good/service.

Question 47

What is Marginal Cost (MC)?

Answer 47

The additional cost incurred from consuming or producing one more unit of a good/service.

Question 48

When should a rational decision-maker increase an activity?

Answer 48

When MB > MC (marginal benefit exceeds marginal cost).

Question 49

When should a rational decision-maker decrease an activity?

Answer 49

When MC > MB (marginal cost exceeds marginal benefit).

Question 50

What is the optimal level of an activity?

Answer 50

When MB = MC.

Question 51

How does a consumer apply the Marginalist Principle?

Answer 51

A consumer buys more units of a good until MB = price (MC).

Question 52

How does a producer apply the Marginalist Principle?

Answer 52

A firm produces more units of a good until Marginal Revenue (MR) = Marginal Cost (MC).

Question 53

How does a government apply the Marginalist Principle?

Answer 53

The government provides public goods until Marginal Social Benefit (MSB) = Marginal Social Cost (MSC).

Question 54

Give an example of a consumer applying the Marginalist Principle.

Answer 54

A student buys burgers until the additional satisfaction (MB) = the price of the burger (MC).

Question 55

Give an example of a producer applying the Marginalist Principle.

Answer 55

A car manufacturer produces cars until the revenue from selling one more car (MR) = cost of producing it (MC).

Question 56

Give an example of a government applying the Marginalist Principle.

Answer 56

The government builds hospitals until the health benefits (MSB) = cost of building them (MSC).