What is the Central Economic Problem?
Scarcity: unlimited wants but limited resources.
Why does scarcity exist?
Because human wants are unlimited, but resources (land, labour, capital, entrepreneurship) are finite (CELL).
What is a ‘want’ and how is it different from ‘demand’?
A want is a desire to have something; demand is a want backed by willingness and ability to pay.
What are the four factors of production?
Land (natural resources), Labour (human effort), Capital (man-made resources), Entrepreneurship (risk-taking and organisation).
What is opportunity cost?
The value of the next best alternative forgone when a choice is made.
Why must choices be made?
Because resources are scarce, so economic agents must choose how best to allocate them among competing uses.
What are the objectives of the 3 main economic agents?
Consumers → maximise utility; Producers → maximise profit; Governments → maximise social welfare.
What is the marginalist principle?
Economic decisions are made at the margin by comparing marginal benefit (MB) and marginal cost (MC). Optimal decision is where MB = MC.
Give an example of unintended consequences in decision-making.
Government ban on PMDs improved safety but reduced consumer convenience.
What are cognitive biases that hinder rational decision-making?
- Sunk cost fallacy 2. Loss aversion 3. Salience bias.
What does the PPC show?
Maximum possible combinations of two goods given resources and technology; illustrates scarcity, choice, and opportunity cost.
What do points on, within, and outside the PPC represent?
On PPC → full employment/productive efficiency; Within PPC → unemployment/underemployment; Outside PPC → unattainable with current resources.
Why is the PPC concave (bowed outwards)?
Because of increasing opportunity cost – resources are not perfectly substitutable.
What causes an outward shift of the PPC?
Increase in quantity/quality of resources (e.g. skilled labour, foreign workers) or improvements in technology.
How does investment in capital goods affect future growth?
Allocating more resources to capital goods increases productive capacity, leading to higher potential growth in the future.
How can a country consume beyond its PPC?
Through international trade – producing what it has comparative advantage in and trading for other goods.
OR
Through investments to improve level of technology.
