Scarcity

Question 1

What is the definition of scarcity?

Answer 1

It is the problem that there are limited resources that cannot fully satisfy unlimited wants

Question 2

What is the definition of opportunity cost?

Answer 2

It is the net benefit of the next best alternative forgone (due to choices made by economic agents)

Question 3

What is the definition of a production possibility curve?

Answer 3

The PPC shows the maximum attainable combinations of two goods produced, with all resources fully and efficiently employed, at a given state of technology

Question 4

How does the PPC illustrate concept of scarcity?

Answer 4

The economy is unable to produce at a point outside of the PPC due to limited resources

Question 5

How does the PPC illustrate the concept of opportunity cost?

Answer 5

When the economy chooses a point on the PPC (e.g. at point A) it will forgo the resources used to produce the other good (from point B)

Question 6

How does the PPC illustrate the concept of choice?

Answer 6

The economy can only one out of the many points on the PPC

Question 7

What is a positive statement?

Answer 7

It involves value-free judgements (aka facts)

Question 8

What is a normative statement?

Answer 8

It involves value judgements and is subjective (aka opinions)

Question 9

What are the types of resources? (factors of production)

Answer 9

C: Capital
E: Entrepreneurship
L: Land
L: Labour

Question 10

What are the factors that causes an outward shift of the PPC?

Answer 10

Q: Quantity
Q: Quality
T: Technology

Question 11

What are the types of shifts of the PPC and how does it occur?

Answer 11

• Parallel shift: when an increase in QQT is able to increase production of both goods equally
• Pivoted shift: when an increase in QQT increases the production of one good more than the other

Question 12

What is the definition of economic growth?

Answer 12

It is the increase in real output of an economy over a period of time (both actual and potential growth needed)

Question 13

What is the definition of marginal cost?

Answer 13

It is the increase in total costs that results from carrying out one additional unit of activity

Question 14

What is the definition of marginal benefit?

Answer 14

It is the increase in total benefit that results from carrying out one additional unit of activity

Question 15

What is the marginalist principle?

Answer 15

An activity is carried out until MC=MB to max. self-interest

• Consumers will consume until Marginal Utility=MC (to max. utility)
• Producers will produce until Marginal Revenue=Marginal Cost of Production (to max. revenue)
• Governments will make decisions till MSB=MSC (to max. social welfare)

Question 16

How does the PPC illustrate concept of increasing opportunity cost?

Answer 16

To produce an additional unit of a consumer good, more units of capital goods are used, as resources are not homogeneous
Hence, it incurs a higher opportunity cost