Scarcity, Choice and Opportunity Cost

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Economics
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the branch of social science that studies the allocation of scarce resources to the production of goods and services used to satisfy consumers’ unlimited wants.
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Wants
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thing people would consume if they have unlimited incomes.
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Resources
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inputs used to produce goods and services.
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Scarcity
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Central Economic Problem; limited quantities of resources to meet unlimited wants.
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Needs
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finite and must be satisfied for people to survive.
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Microeconomics
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the branch of economics that studies how consumers, households or individual firms make decisions to allocate resources in markets.
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Macroeconomics
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the branch of economics that studies economy-wide phenomenon such as changes in unemployment.
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Market
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the world of commercial activity where goods and services are bought and sold
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Factors of Productions
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resources; inputs used in the production of goods and services.
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Land
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Resource supplied by nature. e.g. land, rivers, trees, minerals.
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Labour
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Human resource that includes physical and mental effort directed to production of goods and services.
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Capital
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Man-made resources used in production of goods and services. Usually refers to physical capital like machine, tools and buildings.
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Financial Capital
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financial assets like bonds, stocks or bank deposit; not a resource/factor of production.
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Human Capital
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knowledge and skills people develop that enhance their production capacity.
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Entrepreneur
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someone who organizes factors of productions, innovates new products and ways of production and assumes the risk for it.
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Types of Choices
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1) What and how much to produce? (quantity and proportion of products) 2) How to produce? (technology, composition of resource) 3) For Whom to produce? (distribution of products among society)
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Decision-making units
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Households, Firms, Government
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Households
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Group of individuals that have limited income and selects the combination that allows maximum utility.
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Business Firms
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Organisation that provides goods and services and chooses the goods and services to produce and method of production that allows maximum profit.
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Government
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organisation that provides goods and services, redistributes income and wealth; allocates tax revenue to produce goods and services, to improve macroeconomic performance of country or securing votes in democratic country.
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Opportunity Cost
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the real cost in terms of the next best alternative forgone due to face that limited resources are unable to satisfy unlimited wants. Always positive. (includes time)
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Absolute Advantage
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the ability to produce more of a given productgood using a given amount of resources
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Comparative Advantage
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the ability to produce a good at a lower opportunity cost than another producer
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problems of calculating opportunity cost
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1) requires time and information (limited/misinformation at time of decision, time needed to gather information on alternatives) 2) vary with circumstance (different situation, different alternatives)
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Rational Decision
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decision that yields greatest benefits to cost. Most desirable alternative.
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Marginalist Principle
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any policy or action should be undertaken only if the incremental or marginal benefit exceeds the marginal costs
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Marginal Benefit
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Additional benefit of producing one more unit of a good.
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Marginal Cost
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Additional cost of producing one more unit of a good
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Profit
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total revenue minus total cost
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Production Possibility Curve
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shows the maximum combinations of goods and services that can be produced by an economy in a certain time period, given that all resources are used efficiently at a given state of technology. used to illustrate scarcity, choice and opportunity cost.
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Unattainable Combination
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Point on PPC outside the frontier that is impossible to produce given current amount of resources and state of technology the economy has.
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Attainable combination
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Point on frontier that represent productive efficient levels of production.
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Attainable but Inefficient combination
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Point inside frontier; resources have not been fully and efficiently employed. (Unemployment and Underemployment)
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Unemployment
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situation where all available resources are not used in production of goods and services; idle resources
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Underemployment
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situation where resources are engaged in production but are operating below production capacity.
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Concave to origin PPC
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Resources are not perfectly suitable for production of both goods, as more of a good is produced, increasingly larger quantities of the alternative good is sacrificed.
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Productive Efficiency
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minimising cost of production, fully utilising resources
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Economic Growth
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actual economic growth and potential economic growth
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Actual Economic Growth
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increase in the real output of a country
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Potential economic growth
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increase in the economy’s capacity to produce goods and services.
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Parallel Shift of PPC
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Increase/Decrease in amount or quality of resources or Technological improvement that is suitable for both goods that enable economy to produce more than before.
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Skew of PPC
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Increase/Decrease in amount or quality of resources or technological improvement that is suitable for only one good that enables economy to produce more than before.
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Price mechanism
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the ‘invisible hand’ by Adam Smith, system of allocating resources using price adjustments caused by market forces in a free market economy.
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Economic Efficiency
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maximum benefit for minimum cost.
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Positive Economics
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the analysis of facts or data to establish objective generalizations about economic behavior
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Normative Economics
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An approach to economics that analyse outcomes of economic behaviour, evaluates them as good or bad, and may prescribe courses of action. Also called policy economics.
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Positive Statement
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statement of fact
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Normative Statement
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Statement of value, cannot be proved or disproved. “ought [not] to be”.
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Free Market Economy
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no government intervention, private ownership of all resources and individuals and firms take all economic decisions. Capitalist society.
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Planned Economy
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government owns resources and all economic decision are taken by the goverment. Socialist Society.

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