Topic 1: Central Economic Problem

Question 1

Define scarcity.

Answer 1

Scarcity refers to the situation where limited resources are insufficient to fufil the unlimited wants and needs of society.

Question 2

State the four factors of productions (FOP).

Answer 2

1. Land: refers to natural resources available, including land and minerals
2. Labour: refers to the mental and physical effort of workers measured in terms of man hours
3. Capital: refers to investment goods which are physical assets used to produce goods and services eg. machinery, tools, office buildings
4. Entrepreneurship: An FOP that takes overall responsibility for the decision making process to combine the other three resouces for meaningful production of goods and services

Question 3

Define opportunity cost.

Answer 3

Opportunity cost is the value of the next best alternative forgone

Question 4

What is a Production Posibility curve (PPC)?

Answer 4

The PPC is a curve that shows all the possible combinations of the maximum quantity of two goods that a country can produce within a specified period of time with all its resources fully and efficiently employed at a given state of technology.

Question 5

State all the assumptions of the PPC curve.

Answer 5

1. All available resources are used to produce only two goods
2. Within the same given time period, the quanitity and quality of resources remain the same
3. Resources are fully and efficiently employed to produce the goods
4. Within the given time period, the level of technology remains the same

Question 6

Define productive efficiency.

Answer 6

It refers to a situation where the economy is able to produce the maximum output for a given amount of inputs. All points on the PPC are productive efficient.

Question 7

Define allocative efficiency.

Answer 7

It is acheived when society produces and consumes the optimal/right mix of goods and services that maximises its welfare. There can only be one combination of goods and services on the PPC that is allocative efficient.

Question 8

How is actual economic growth represented on a PPC?

Answer 8

Actual economic growth refers to the annual percentage increase in real national output actually prodcued.
It is represented by the economy initually not operating on the PPC but within it, when idle resources are utilised the output produced increases and the economy is now operating on the PPC.

Question 9

How is potential economic growth represented on the PPC?

Answer 9

Potential growth is defined as an increase in the productive capacity of an economy to produce more goods and services.
It is represented by the economy shifting or expanding its PPC outwards.

Question 10

What is the Marginalist principle?

Answer 10

The marginalist principle involves weighing the marginal benefit against the marginal cost resulting from a decision to determine the optimal level of action.

Question 11

What are the objectives of the respective economic agents?

Answer 11

Consumers maximise utility at Marginal Private Benefit = Marginal Private Cost
Producers maximise profits at Marginal Profits = Marginal Cost of production
Governments maximise social welfare at Marginal Social Benefit = Marginal Social Cost