Economics points test 1

The basic economic problem is that there are scarce resources and infinite wants. In order to solve this problem we must ask 3 questions. What to produce? How to produce it? And whom to produce it for.

The basic economic problem is that there are scarce resources and infinite wants. Oil is a scarce resource and there are competing demand for its use. In order to determine which of the infinite wants are satisfied by the use of oil a market price is charged.

The individual has scarce resources of both time and money. They need to make choices about how to use these resources in order to satisfy their infinite wants. E.g. they might chose to buy a new car instead of going on holiday.

• Land - rent
• Labour - wages
• Capital - interest
• Enterprise - profit

Scarcity exists because there are not not enough resources to fully satisfy everybody's wants.  In life wants will always exceed means.

Opportunity cost is the sacrifice of the next best alternative forgone. E.g. staying on at college means sacrificing the opportunity to get a full time job which pays wages.

Investment can be defined as any production not for current consumption e.g. the purchase of non-current assets such as machinery or buildings.

• An advancement in technology. e.g. new equipment invented.
• An increase in the quantity of factors of production. e.g. net migration of labour.
• An increase in the quality of factors of production. e.g. education and training of labour.

• Increase in skill and dexterity. The more you do something the better at it you become.
• Time saving. Time is often wasted moving from one task to another. By only doing one task this time is saved. Additionally staff may need less training.
• Individual aptitudes. This just means that people can concentrate on doing what they are naturally good at.

• Alienation of the workforce. Working independently may impact negatively on their motivation. May feel isolated/distant from colleagues.
• Interdependency. Workers may become over reliant upon one another. A problem at one stage of the production process can therefore slow down or halt the entire process.

Specialisation involves individuals, firms, regions or economies concentrating their efforts on the production of some goods and services rather than others. This can lead to increased output and efficiency gains. This means that surplus can be exchanged with other individuals/economies. E.g. Scotland may specialise in the production of whisky and trade it's surplus with France to benefit from the consumption of champagne which is not produced domestically.

Land which is defined as the free gifts of nature. The factor income for land is rent.

Labour is defined as the exercise of human mental and physical effort in the production of goods and services. The factor income for labour is wages.

Capital is defines as, all those goods which are used in the production of further wealth. Fixed capital includes buildings and machinery. Working capital includes stocks of raw materials. The factor income earned in return for capital is interest.

Enterprise which usually manifests itself as an entrepreneur. This is a person who hires and combines the other factors of production and who is responsible for taking the risk of producing goods and services in anticipation of demand. The factor income earned for enterprise is profit.

A production possibility frontier shows the productive capacity of a simple economy. This shows the maximum combination of two goods which can bee produced when using all scarce resources efficiently given the current state of technology.

• A straight line PPF assumes that there is perfect factor mobility. This means that a similar use is made of similar factors of production to make the two goods. E.g. cans of coke and cans of pepsi. The opportunity cost remains constant along the boundary.
• A bowed from the origin PPF assumes that there is not perfect factor mobility. This means that different uses of factors of production are necessary to make the two goods. e.g. guns and butter. The opportunity cost increases along the boundary.

• * PPF shift to the right *
• An advancement in technology would cause a shift from PPF to PPF1.

• * PPF pivot for ketchup and nail polish *
• A pivot from PPF to PPF1 has occured due to either an advancement in technology, or an improvement in the quantity or quality of factors of production relation to the production of nail polish only. For example, a new machine has been invented which has improved the efficiency of nail polish leaving ketchup production unchanged.

• * PPF opportunity cost diagram for ketchup and nail polish *
• Opportunity cost is the sacrifice made of the next best alternative forgone. In the diagram above, a movement from point A to point B means sacrificing production of ketchup (K -> K1) in order to expand production of guns (G -> G1)