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C2: Central Problem of Economics - Coggle Diagram
C2: Central Problem of Economics
Scarcity
When there are
UNLIMITED
wants but
LIMITED
resources
Examples
Individuals want the newest phones
Firms want to build more factories and upgrade to most advanced tech
Govt wants to build more schools and hospitals for country
Factors of Production
Labour/ Human Capital
Refers to the physical and mental effort of workers, in the production of goods and services
Labour services are bought and sold on the labour market, not labour
Human capital is the quality of the labour force, which can be improved via education and healthcare
Income received from labour is called wages
Capital
Refers to the stock of man made physical resources
Includes factories, roads, and tools
Also includes infrastructure like railways, hospitals, schools, airports etc
Income received by owners of capital resources is called interest
Land
Refers to the availability of natural resources, both renewable and non renewable
Renewable energy includes water, solar and wind
Non renewable resources includes fossil fuels, mineral deposits
Income received by land owners is called rent
Entrepreneurship
Refers to the factor of production that take overall charge, risk and responsibility for the decision making process
Without entrepreneurship, other FOPs will remain stagnant and idle
Combines the use of all FOP to provide goods and services
Opportunity Cost
Refers to the
value of the net benefit
that could have been
derived from the second best alternative
forgone when a choice is made
Examples
For individuals, in exchange for watching an extra hour of TV, we forgo the possibility of doing our homework for an hour. Therefore, the opportunity cost of watching TV is the net benefit of doing homework
For producers/ companies, a farmer decides to grow coffee instead of tea as a cash crop. Therefore, the opportunity cost of growing coffee on a plot of land is the net benefit of growing tea on the same piece of land
For governments, by putting aside $5 billion dollars for the national defence, the government has to reduce their spending on the healthcare, and education sectors. Therefore, the opportunity cost of allocating money into national defence is the net benefit of allocation of money into other sectors
Application
When a country can produce a product at a lower opportunity cost than another country, it is said to have a comparative advantage over that country
Theory of Comparative Advantage states that when 2 countries that specialise in the areas that they have a comparative advantage in trade, the total output of goods and services also increases
Increase in production of goods and services also means that there is an increase in standard of living (SOL)