Scarcity as the Central Economic Problem

Question 1

Positive Economics

Answer 1

Dealing with objective explanations of the working of the economy, statements which can be verified to be correct or incorrect by looking at evidence and tested by reference to empirical formula.

Question 2

Normative Economics

Answer 2

Dealing with subjective aspect of economics, involving value judgement. Statements tell us what ought to be or should be, and difficult to resolve even with empirical observations.

Question 3

Scarcity

Answer 3

The excess of human wants over what can actually be produced.

Question 4

Capital

Answer 4

Man made material or physical resources used for production of goods and services.

Question 5

Entrepreneurship

Answer 5

Willingness and ability to take risks and mobilise the other factors of production to make profits.

Question 6

Land

Answer 6

All natural resources available, which can be renewable or non-renewable.

Question 7

Labour

Answer 7

All human efforts, both physical and mental which are used in the production of goods and services.

Question 8

Opportunity Cost

Answer 8

The cost of any action or decision, measured in terms of the next best alternative forgone.

Question 9

Production Possibility Curve

Answer 9

Shows all the possible combinations of two goods that a country can produce within a specified time period, with all its resources fully and efficiently employed and at a given state of technology.

Question 10

Unemployment

Answer 10

A situation where some available resources are not used in the production of goods and services.

Question 11

Underemployment

Answer 11

A situation where output is not maximised for a given amount of input used.

Question 12

Law of diminishing marginal utility

Answer 12

The more of a product a person consumes, the less will be the additional utility gained from consuming one more unit.

Question 13

Scarcity on the PPC

Answer 13

It is illustrated by the negative slope of the PPC that sets a boundary between attainable and unattainable combinations of the two goods.
Points outside the PPC represents the combination of two goods that are unattainable due to limited resources, representing the idea that not all wants can be satisfied.

Question 14

Choice on the PPC

Answer 14

It is illustrated by the various combinations of two goods that lie on the PPC that the country can choose.

Question 15

Opportunity cost on the PPC

Answer 15

When a choice is made between two combinations on the PPC where resources are fully and efficiently employed, opportunity cost is incurred.
Show the trade off between any two points in your PPC diagram.

Question 16

Increasing Opportunity Cost on the PPC

Answer 16

It is illustrated by the PPC being concave to the origin. As more of one goods are produced, an ever increasing amount of the other good has to be sacrificed as factors of production are not homogeneous. Resources that are less and less suited for production of goods are used. As a result, the amount of other good forgone increases with every additional unit of good produced.