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Theme 1: The Central Economic Problem, Adobe Scan 24 Feb 2024_page-0001,…

- - - - man-made resources used in further production of other goods and services eg. machine, buildings
        
        productivity of capital limited by state of technology
    - - funds/monetary assets available for investment/production eg. cash, stocks, bonds
- - - - command economy
        
        economic decisions made by central authority (government)
      - mixed economy
        
        economic decisions partly by government and market
      - free market economy
        
        economic decisions made by market according to demand and supply forces (invisible hands)
  - - - the value refers to the level of satisfaction and benefits of society
- - - - self -interest maximising behaviour of economic agents
        
        producers/firms
        
        maximise profits (total revenue - total cost, marginal revenue) given limited resources like labour/capital)
        
        keep producing till MB = MC
        
        Governments
        
        maximise social welfare (subject to budget constraint) - debatable
        
        consumers
        
        maximise utility (benefit/satisfaction received when consuming g/s, subject to budget constraint)
  - - - requires every economic agent to deliberate on various choices + considerations
      - considerations
        
        constraints (which affects human behaviour)
        
        cost and benefits
        
        information + different perspectives
        
        impact (+/-): changes, intended and unintended consequences --> multi-faceted implications eg. impact other economic agents
        
        must review decision
- - - - achieved when firms in an economy are producing maximum output for given amount of inputs, or producing given output with least cost combination of inputs
      - resources are fully employed to achieve maximum output
    - - achieved when current combination of g/s produced and consumed allows society to attain (maximises) greatest level of satisfaction
      - value placed/price offered for last unit of good equals additional costs incurred in production, total economic welfare maximised [P=MC]
        
        if P>MC, society welfare will still increase by producing an additional good
        
        if P<MC, too many resources allocated, reduce output of good to maximise welfare
- - - - Constraints
        
        with current amount of resources and state of technology, economy can only produce the combinations of goods at points on or inside PPC (attainable combinations)
      - Choice
        
        economy’s has to choose one production point among all attainable combinations of goods
      - Opportunity costs
        
        downward slope of PPC (when limited resources are fully employed in economy, in order to produce more units of one good, have to produce less of another
        
        Down the slope, increasing opportunity cost (value of next best alternative forgone - y axis) as more resources are allocated to increase production of other good
      - unemployment (not all res. utilised) / underemployment (not efficiently utilised)
        
        points inside PPC inefficient, not producing maximum output with given resources
      - productive efficiency
        
        all points on PPC, suggests maximum output/ combination of g/s when all available resources are fully and efficiently employed
      - allocative efficiency
        
        illustrated by only one productive efficient point on PPC) --> suggests maximum combination of output --> maximise welfare
        
        can change over time with preference, income distribution etc.
      - Scarcity
        
        unattainable combinations outside PPC
        
        the need to make choices given unlimited wants
    - - PPC concave to origin
        
        Down the slope, increasing opportunity cost (value of next best alternative forgone - y axis) as more resources are allocated to increase production of other good
        
        resources in economy not suitable to produce both goods alternative good sacrificed
    - - Actual economic growth
        
        short-run growth, measured by % annual change in national output (g/s) actually produced
        
        illustrated by outward movement from production point within PPC to closer/on PPC
        
        increase in one good without fall in another
        
        occurs with better utilisation of existing resources by reducing under/un-employment
      - Potential economic growth
        
        long-run economic growth, increase in productive capacity of economy
        
        illustrated by outward shift of PPC
        
        factors include:
        
        a) increase in quantity and quality of resources
        
        increase production, PPC shifts outwards
        
        parallel shift: resource is adaptable to production of both goods
        
        skewed shift: resource better suited to production of one good --> greater shift towards the good
        
        if increase in quantity/quality of resource/technological advancement better suited for the production of that good
        
        more capital goods produced in one period, more output produced next period --> present consumption must be reduced to produce current capital goods
        
        if more consumer goods produced currently, PPC will experience relatively smaller increase in productive capacity (lesser capital goods), and higher level of consumption in current time period
        
        if more capital goods produced, PPC will experience greater increase in productive capacity --> higher possible output in future, increase level of future consumption (sacrifice certain amount of current consumption)
        
        b) technological advancement
        
        lead to new and better methods of producing goods
        
        in one g/s --> PPC shift in skewed manner
        
        both g/s, entire PPC shift outwards in parallel manner
      - PPC shifts inwards
        
        reduction/loss in quantity/quality of resources (NOT in technological advancement)
        
        eg. exhaustion/depletion of key non-renewable land resources like oil, or disasters --> quantity of g/s
        
        eg. economy fails to produce enough capital goods to replace worn out (depreciation) --> quantity and quality of g/s
        
        if economy faces recession, PPC will illustrate movement from one production point on/closer to PP to production point further from PPC (NOT shift in PPC)