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The central economic problem - Coggle Diagram
The central economic problem
Efficiency
Economic efficiency is where each good is produced at the minimu cost and where individual people and firms get the maximum benefit from their resources.
Productive efficiency
It is achieve when the firms in an economy are producing the
maximum output
for the
given amount of input
or producing a given output with the least combination of inputs.
Allocative efficiency
It is achieved when the current combination of goods and services
produced and consumed
allows the society to attain the
greatest level of satisfaction
.
Maximum welfare is achieved when the consumer’s valuation of the last unit of the good (P) is equal to the opportunity cost of producing the last unit of the good (MC).
Resources
Entrepreneurship
It is a human resource which is separate from labour. It refers to the managerial ability that involves the organising of factors of production and entrepreneurs are rewarded in the form of profits by taking the risks related to the production of goods and services.
Land
It includes all those productive resources supplied by nature, not only land in terms of plots of land but also renewable and non-renewable resources freely supplied by nature, such as rivers and oil respectively
Capital
It does not mean money to an economist, it is a man-made resource used in the further production of other goods and services rather than being consumed for their own sake. Eg machines and buildings
Labour
Labour refers to the physical and mental human effort directed to the production of goods and services
Positive and normative economics
Positive economics refers to a statement that is capable of being refuted by reference to evidence
Normative economics refers to a statement of value of subjective opinion that cannot be proved or disproved by an appeal to facts
Scarcity, choice and resource allocation
Choice is the act of selecting among alternatives. By making a choice, alternatives have to be foregone, this leads to oppportunity cost
Opportunity cost is the value of the next best alternative foregone when a choice is made
Scarcity refers to making rational decision on how limited resources should be utilised to obtain the highest level of consumer satisfaction
Production possibility curve
Assumptions
Production is observed over a specific time period
Resources are fully employed and efficiently utilised
There is no change in the level of technology
Quantity and quality of resources used remains the same
Illustrates
Scarcity
It is shown by the unattainable combinations outside the PPC.
Choice
Is shows by the fact that the society has to choose among the attainable combinations of the 2 goods as the economy can only be producing at one point at a time.
Constraints
Constrained by current state of technology
Constrained by the quantity and quality of the resource.
Opportunity cost
Illustrated by the
downward slope
(negative gradient) of the PPC.
If society chooses to have more of one good, it has to give up some of the other good, showing
increasing opportunity cost
.
Productive efficiency
Is illustrated by production points on the PPC, where all available resources are fully employed to produce the maximum amount of output possible.
Unemployment and underemployment
They are points inside the PPC.
Unemployment
is when not all available resources are used in the production of goods.
Underemployment
is when resources are engaged in production but are operating below their potential capacity due to inefficient utilisation.
Allocative efficiency
It is illustrated by only one point on the PPC as the production point that acheives allocative efficiency is the combination of goods which maximise the society’s welfare.
The allocative efficient production point can change over time due to the change in tastes, preferences or income.
Economic growth
Actual economic growth
It is short-run growth and is measured by the percentage annual change in national output produced
On a PPC, it is shown by an outward movement from a production point within the PPC to a production point closer to or on the PPC.
Potential economic growth
It is the increase in the
productive capacity
of the economy.
Increase in the
quantity
of resources
It enables the economy to produce more than before, hence shifting the PPC outwards.
Resources are your CELL.
A
parallel outwards shift
means that the resource shoes availability is altered is
perfectly adaptable
to the production of both goods.
A
skewed outwards shift
means that the resource is better suited for the production of one good. Opportunity cost of producing a good will decrease.
Improvements in the
quality
of resources
Technological advancements
Consists of the use of tools, machines and materials, as well as plans that aid in the production of goods and services.
It can lead to new and better methods of producing goods .
If the technological improvement aids the production of one good more than the other, the PPC will shift in a skewed manner, otherwise the entire PPC will shift outwards in a parallel manner when it enhances the production of both goods equally.
Rational decision making and the marginalist principle : :
Rational decision making involves weighing the marginal benefit against the marginal cost of any activity
Marginal benefit refers to the additional benefit gained from consuming or producing one more unit of the good
If MB is greater than MC from the consumption of an additional unit of good or service, the economic agent will increase consumption
Hence the economic agent will consume to when MB=MC to maximise its self interest
Marginal cost is the addtional cost incurred from consuming or producing one more unit of the good
If MC is greater than MC from the consumption of an additional unit of good or service, the economic agent will decrease consumption
Hence the economic agent will consume to when MB=MC to maximise its self interest
Self interest maximising behaviour
Firms aim to maximise profits, which is the difference between total revenue from selling goods or services and the total cost of producing them, given their limited resources. Firms will produce to the point where its marginal revenue is qual to its marginal cost to maximise profits
Governments aim to maximise social welfare, subject to the government budget constraint.
Consumers aim to maximise utility, which refers to the benefit or satisfaction consumers receive when they consume a good or service
Decision making framework
Economic agents must be aware of the constraints, costs and benefits, information needed and different perspectives of the issue. The impact of the decisions can be analysed in terms of intended consequences and unintended consequences. Economic agents might need to review their decisions should the intended onsequences and unintended consequences, or when changes occur