Scarcity and choice

• Define scarcity and the basic economic problem

  A situation in which wants and needs are greater than the resources available. This makes it difficult to allocate these scarce resources between alternative uses
• What is meant by ceteris paribus and why is it applied


  "All other things being equal" it acts as a shorthand indication of the effect one economic variable has on another, provided all other variables remain the same.
• What are the key economic questions

  What to produce? How to produce? For whom to produce?
• Why do we need to answer the key economic questions

  So economies can decide how to produce and allocate goods and services using their limited resources.
• Characteristics of the short run

  within a certain period in the future, at least one input is fixed while others are variable
• Characteristics of the long run

  situation in economics wherein all factors of production and costs are variable. The long run allows firms to operate and adjust all costs.
• Characteristics of the very long run

  all factors of production are variable, and additional factors outside the control of the firm can change, e.g. technology, government policy. A period of several years.
• How people make decisions at the margin


  consider the incremental or additional changes that result from a small, incremental change in a variable
• What is a positive statement + example


  Can be tested and validated, are objective. Example "higher taxes result in reduced consumption"
• What is a normative statement + example


  a statement that includes a value judgement, subjective and cannot be refuted just by looking at the evidence. Example "the government should increase taxes on tobacco products in order to reduce smoking"
• What are the factors of production

  Land, Labour, Capital and Enterprise
• What are the various rewards to each of the factors of production

  for land is rent, for capital is interest, for labor or human capital is wages, and for entrepreneurship is profit.
• What is meant by specialisation


  The way in which people, organisations and economies concentrate on specific economic activities, often because they have some advantage in that field
• List 2-3 advantages of specialisation

  Increases productivity in workers

  Lower average costs

  Production levels increase
• List 2-3 disadvantages of specialisation

  Quality may suffer due to boredom

  Skills may suffer as workers are only doing one job

  Workers may eventually be replaced by machinery
• What is division of labour


  the assignment of different parts of a production to different people/parts of society in order to improve efficiency.
• What is a centrally planned/ command economy

  an economic system in which the government makes all decisions and controls output levels
• Advantages of a command economy

  low levels of inequality and unemployment and the common objective of replacing profit with equality as the primary incentive of production
• Disadvantages of a command economy

  Does not meet the needs of consumers. No incentive for people to work hard. Requires a large bureaucracy to make decisions.Consumers cannot choose and only those goods and services are produced which are decided by the government.
• What is a market economy

  an economic system where supply and demand direct the production of goods and services. Controlled by the price mechanism
• Advantages of a market economy

  Competition encouraging Efficiency; Freedom of choice; Incentives
• disadvantages of market economy

  Doesn't provide for everyone or enough basic goods and services

  High degree of uncertainty

  May not provide public goods due to profit incentive
• What is a mixed economy


  an economic system combining private and public enterprise.
• Features of a mixed economy

  Governments can address market failures, provide public goods and redistribute income. But the extent of their intervention varies widely among mixed economies.
• What is the role of enterprise in the modern economy?


  Entrepreneurial activity helps create new jobs, fosters innovation, and drives market competition, which ultimately benefits consumers
• What is a transition economy

  1. An economy that is changing from a centrally planned economy to one driven by market forces.
• What are the issues of transition

  Structural unemployment due to changing market conditions

  Increased inequality

  Inflation due to large state deficit
• What causes the PPC/F to shift outwards?

  Increase in the quantity or quality of factors of production
• What causes the PPC/F to shift outwards?

  Decrease in the quantity or quality of factors of production
• Where can productive efficiency be seen on a PPC/F

  Points on the interior of the PPC are inefficient, points on the PPC are efficient, and points beyond the PPC are unattainable.
• How is unemployment related to the PPC

  unemployment will be shown as a point inside the curve. PPC will retreat inwards due to fewer resources.
• What is the difference to society when producing capital goods as opposed to consumer goods


  The purpose of capital goods is to help produce other products. They are meant to be used for production, while consumer goods are bought for personal and final consumption.

  Capital goods include machinery, buildings, increments

  Consumer goods are food, clothing
• What are the four functions of money


  medium of exchange, unit of account, store of value, standard of deferred payment
• explain 'a medium of exchange' as a function of money


  It can be used to buy and sell goods and services and is acceptable everywhere as people can use it to buy what they want.
• Explain the 'unit of account' as a function of money


  to provide objective, measurable value to different goods and services. makes it easy to complete economic transactions, such as buying and selling. A unit of account refers to a measurement that can be used to value goods and services, make calculations and record debt.
• Explain 'store of value' as a function of money


  money can be saved and used for future purchases. Giving individuals the freedom to distribute their spending over time. However inflation can erode the purchasing power of money.
• Define barter and double coincidence of wants

  barter system refers to the exchange of goods & services with two or more parties without the use of money.

  It can work when there is an existence of Double Coincidence of Wants- a situation where both parties hold an item needed by the other to fulfill their demand
• Distinguish between economic good and free good

  A free good is a good with zero opportunity cost. This means it can be produced by society in as much quantities as needed with little or zero effort. An example would be of oxygen and water.

  
  

  An economic good is a good or service that has a benefit (utility) to society. Also economic goods have a degree of scarcity and therefore an opportunity cost. Most goods fall into this category
• Explain using examples the impact of sustainability on scarcity and choice


  limited resources = non-renewable (i.e. oil and coal) they cannot be used for future benefits
• Explain the role of economic agents: government, firms, households


  Households are buyers in the market for goods and services. Households exchange income for goods and services. Businesses are sellers in the market for goods and services. They sell goods and services in exchange for money, which in this case is called revenue. Governments are responsible for providing public goods and services and regulating businesses. They are also responsible for stabilization, which means they use fiscal and monetary policy to maintain economic stability