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
  • 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
  • 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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