Foundations of Economics
- Created by: Randy
- Created on: 10-04-13 05:23
- Define, give examples of, and distinguish between, goods and services; needs and wants; economic goods and free goods
- Economic good: a good in which opportyunity costs are involved in consumption and are relatively scarce
- ex.: fresh food, clothing, cars
- Free good: a good in which no opportunity cost is involved in consuption and is not relatively scarce
- ex.: air, salt water
- Need: good necessary for survival; Want: good necessary for enjoyment
- Goods: physical objects that are capable of being touched
- vegetables, motorcars
- Services: intangible things that cannot be touched
- repairs
- Economic good: a good in which opportyunity costs are involved in consumption and are relatively scarce
- Define opportunity cost and understand its link to relative scarcity and choice
- Opportunity cost: the cost of using a resource measured in terms of the sacrifice foregone in the next best alternative. When the best alternative is chosen from a range of alternatives the second best choice is the opportunity cost.
- Explain the basic economic problem
- "What to produce?"
- the choice of the economy touse the scarce resources in what they want to produce
- "guns vs. butter"
- "How to produce?"
- many different ways of production and combinations of recources that can be used in production
- manual vs technology
- "How much to produce?"
- Scarce resources must be allocated efficiently for production
- "What to produce?"
- Describe the factors of production
- Land or Natural Resources: not man made: land, minerals, wood, fish.
- Labour: human resources determined by population, age, skill and training.
- Capital: man made tools such as buildings, equipment, and machinery
- Entrepreneurship: undertake the risk of organizing and combining factors for production.
· Explain, illustrate, and analyze production possibility curves
o Point B on the PPF shows the maximum that can be produced with existing resources and technology, it is a point of productive efficiency.
o The negative slope of the PPF reflects basic scarcity
o The law of diminishing returns implies a convex PPF: as resources are transferred from one use to another, the increment in output becomes smaller, the opportunity cost larger.
· Resources are being released in the wrong combination
· The resources being released are less and less suited to the new use
o Point A inside the frontier is productively inefficient: more of one good could be produced without sacrificing any of the other:
· Under market systems it is called unemployment
· Under central planning it is called inefficiency.
o Point C can only be reached through:
· Trade
· The discovery of more resources
· Increased labour productivity from greater education and training
· Increased capital productivity from an increase in technological knowledge.
· Distinguish between microeconomics and macroeconomics; positive economics and normative economics; private sector and public sector
o Microeconomics: system which examines the economic behaviour of individual actors such as businesses, households, and individuals, with a view to understand decision making in the face of scarcity and the allocation consequences of these decisions
o Macroeconomics: system which examines an economy as a whole with a view to understanding the…
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