the central economic problem

• Scarcity is the problem where limited resources are unable to satisfy unlimited human wants
• Economic agents are Consumers, Producers and Governments and they face the problem of scarcity, hence having to make choices to satisfy unlimited wants
• Opportunity cost is the net benefit of the next best alternative forgone when a choice is made
• The Production Possibility Curve (PPC) shows the maximum attainable combinations of two goods that can be produced by an economy within a specified period of time with all its resources fully and efficiently employed, at a given state of technology
• When a point is outside the PPC, it illustrates the problem of scarcity as it represents points at which the country would want to produce but is unable to due to limited resources
• The concept of opportunity cost is illustrated by the downward-sloping nature of the PPC
• If the economy moves from A to B on the PPC, then there will be a loss of output of good X and gain of output of good Y
• In order to produce more of one good, the economy must forgo the net benefit derived from the production of the other good
• When the shape of the PPC is shown to be concave to the origin, it shows the concept of increasing opportunity cost
• Increasing opportunity cost reflects that some resources are better suited to the production of certain goods rather than others. This is because resources are not homogeneous (perfect substitutes).
• Consumer goods are products that have no future productive use and are used directly by consumers to satisfy current wants
• Capital goods are goods that help increase the productive capacity of a country, and they determine the capacity to produce for future consumption
• When the shape of the PPC is concave to the origin, it means that an increasing amount of one good has to be given up to produce additional units of another good
• The concept of opportunity cost is illustrated by the downward-slopping nature of the PPC
• The productive capacity of an economy can increase due to the increase in the quantity of resources, improvement in the quality of resources and improvements in technology
• A decrease in QQT will result in an inward shift of the PPC
• The PPC will undergo a parallel shift if a positive change in any of the factors is able to enhance the production of both goods equally
• The PPC will undergo a pivoted shift if a positive change in any factor is able to enhance the production of one good more than the other
• Economic resources/Factors of Production include Capital, Entrepreneurship, Land and Labour (CELL)
• Capital refers to all man-made material/physical resources used or available for production, and the return paid to the capital owners is known as interest
• Entrepreneurship refers to the factor of production that takes overall responsibility for the decision-making process in the firm so that the others (CLL) can be employed efficiently. They also take on risks of the business, which include innovation of new products and methods of production. Entrepreneurs are paid profits.
• Labour refers to people, including their skills and abilities, they are paid wages
• Land refers to all the natural resources available, and the return paid to landowners is known as rent
• Economic growth is the increase in the real output of an economy over a period of time
• Actual economic growth is the percentage annual increase in national output
• Potential economic growth is the percentage annual increase in the economy's productive capacity or maximum possible output
• When an economy priorities capital goods, there will be a larger shift in PPC