Theme 1: Central Economic Problem Flashcards
Define “Factors of production”
The factors of production are defined as the resources that are used in the production of goods and services
CELL
Define “Capital” as a factor of production
Capital refers to man-made goods that are used to produce other goods and services over a period of time
Define “Entrepreneurship” as a factor of production
Entrepreneurship refers to the factors of production that takes the overall responsibility for the decision-making process in the firm so that the other factors of production (land, labour and capital) can be combined to produce a good or service
Define “Labour” as a factor of production
Labour refers to human beings as factors of production
Define “Land” as a factor of production
Land is a factor of production that encompasses all natural resources available
Define “Scarcity”
Scarcity is a situation where human wants are unlimited whereas the resources avaliable to satisfy these wants are limited
Define “Opportunity Cost”
Opportunity cost is defined as the value of the next best alternative forgone
Explain how scarcity leads to incurs an opportunity cost
- [Define scarcity]
- [State the resource that is limited]
- Since most resources have alternative uses,
- scarcity necessitates a choice and allocation of resources among competing uses.
- This incurs an opportunity cost (value of the next best alternative forgone)
What is a Production Possibility Curve (PPC)
A production possibility curve (PPC) shows all the possible combinations of 2 goods a country can produce within a given time period with its resources fully and efficiently utilised at a given state of technology
How does PPC illustrate productive and allocative efficiency?
Productive efficiency
* A point inside the PPC is attainable but productive inefficient as good and services are not produced at the lowest possible average cost of production.
* This could be due to resources not being fully employed and that there is underutilisation of resources (umemployment/underemployment)
Allocative efficiency
* Points on the PPC are all productive efficient,
* however society will only deem one of the points as allocative efficient where society’s welfare is maximised
* and the combination of 2 goods are fully aligned to the society’s tastes and preferences
What does a movement from a point inside the PPC to a point on the PPC mean
The country’s resources and are now fully and efficiently utilised
How does PPC illustrate scarcity?
Points outside the PPC are unattainable combinations. It shows that society is contrained by the current amount of avaliable resources and its level of technology, and hence faces scarcity
How does PPC illustrate choice?
Points on the PPC are attainable combinations, hence the economy has to make a choice between the different combinations on the PPC
How does PPC illustrate opportunity cost?
Opportunity cost is illustrated by the downward sloping nature of the PPC. When it moves from point A to point B, an opportunity cost will be incurred.
A PPC is concaved to its origin which reflects the increasing opportunity cost. This is because some resources are better suited for the production of some goods than others.
When the economy concentrates more on the production of one type of good, it has to start using resources that are less suitable. Hence more resources need to be diverted from the production of the other good to produce more of this good.
How does PPC illustrate actual economic growth and potential economic growth?
Actual economic growth is defined as the realised increase in real national output for a given period of time and can be illustrated by the movement of a point within the PPC to a point nearer to or on the boundary of the PPC
Potential economic growth is defined as the increase in the economy’s productive capacity over a given time period where there is an outward shift of the PPC. The economy can hence produce more goods and services which could lead to higher consumption and hence higher material standard of living.
