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Basic economic ideas and resource allocation - Coggle Diagram
Basic economic ideas and resource allocation
Scarcity, choise and opportunity cost C°1
Needs: Things that are necessary for survival, such as food
Scarcity: A situation in wich wants and needs are greater than the resources available
Wants: the goods and service that people may like to have but are not always realised
Choice: Resources are scare so individuals, firms and govermmens have to consider alternatives
Resources: Inputs available for the production of goods and services
Fundamental economic problem: Scare resources but unlimited wants, sometimes called the basic economic problem
Opportunity cost: The next best alternative that is foregone when a choice is made
Factors of production: Land, Capital, Labour, Enterprise
Factors of production C°3
Factors of production: Are the means by which an economy produces goods and services to meet the needs of its population.
Human capital: The value of labour to the productive potencial of an economy.
Physical capital: Factors of production such as machinery, builings and infrastructure
Specialisation: The process by which individuals, firms and economies concentrate on producing those good and services where they have an advanteaje over others.
Division of labour: where a manufacturing process is split into sequence of individuals tasks
The role of the entrepreneur: Individuals who organize production and take financial risks to create businesses.
Key Roles:
Combine land, labour, and capital to form business opportunities.
Invest personal money or borrow funds to achieve goals.
Accept risks—if the business fails, they may lose money.
Firm. Any business that hires factors of production to produce goods and services.
Economic methodology C°2
Economics: is the study of how resources are allocated to satisfy human needs and wants.
Microeconomics: Is the study of individual markets, it looks at the behaviour and decisions of consumers and firms and how they interact.
Macroeconomics: Is the study of the whole economy or group of economies. Focuses on large-scale economic trends that affect entire countries and global markets.
Normative statements: A statement that is based on the economist’s opinion or value judgement and which cannot be proven.
Positive statements: A statement that is based on facts or actual evidence
Ceteris paribus: Latin term meaning all "other things remain equal" Used by economics to model on the effect of one change while assuming everything else stays the same
The Margin: Is another tool economics use to simplify a situation. Helps predict how one small change affects other related factors. Its important to Simplifies economic analysis and helps economists understand the impact of incremental changes. The importance of time periods
Short run: Time period when a film can change at least one but not all factor inputs
Long run: Time of period when all factors of produccion are variable but with a constant, such as the state of technology
Very long run: Time period when all key inputs into produccion are variable
Resource allocation in different economic systems C°4
Economic systems: An economic system is the way a country organizes and manages its resources, production, and distribution of goods and services
Types of Economies:
Low-income countries: People earn very little, and many struggle to afford basic needs like food, healthcare, and education.
Middle-income countries: People earn more, and there’s a mix of rich and poor. Some areas have good services, but others still struggle.
High-income countries: People earn a lot on average, and most have access to good healthcare, education, and a high standard of living.
Market Economy: An economic system where most decisions are taken through the market mechanism
The price mechanism: The way prices adjust in a free market to balance supply and demand. Helps decide what to produce, how much to produce, and for whom without government interference.
Government role: In a true market economy, the government should not directly interfere. However, market failures may require government intervention.
Planned Economy: A planned economy is one where the government controls all major economic decisions.
What to produce.
How to produce it.
For whom to produce.
Mixed Economy: A system where both the private sector and public sector government contribute to economic decisions.
Private sector: that part of an economy under private ownership
Public sector: the part of an economy under government ownership
Privatisation: where there is a change in ownership from the public to the prívate sector
Production Possibility Curve (PPC) C°5
PPC: A simple representation of the maximum level of output that an economy can achieve, given its current resources and state of technology, may be referred to as a production possibility frontier.
How the PPC Works?
The PPC illustrates the maximum output of two goods using all available resources. Producing more of one good means producing less of the other. The curve represents full and efficient use of current resources and technology. It is also called the production possibility frontier it marks the boundary of what’s possible to produce.
Trade-off: What is involved in deciding whether to give up one good for another good.
Productive capacity: The maximum output that can be produced when all resources are used fully.
Scarcity and choice: On a production possibility curve.
•Choice is represented by any point on the curve. This indicates the many possible choices of combinations of goods when maximising the use of available resources.
•Scarcity is represented on the axes by the maximum possible outputs that are possible with these resources.
Time: The simple model of a production possibility curve shows the effects of a change to the allocation of resources in the short-run and long-run periods.
Classification of goods and services C°6
Three Groups of Goods & Services:
Free Goods: goods that are not scare and have zero opportunity cost
Private Goods: goods that are consumed by one person and not available to anyone else(ex phones, clothes).
Public Goods: good which is both non excludable and non rival (ex., street lighting, public parks).
Private Goods:
• Involve scarce resources and opportunity cost.
• Have a price due to limited supply and demand.
• Consumed by individuals or firms for personal benefit.
• Excludable and rivalrous.
Free Goods
• Zero opportunity cost – not limited by scarcity.
• No price; freely available in nature.
• Examples: Air, rain, wild berries, river water (in some contexts).
Public Goods
• Provided for everyone’s benefit, without reducing availability for others.
• Non-Excludable and Non-Rivalrous.
• Examples: Fire protection, police force, national security, street lighting, traffic lights.
Quasi-Public Goods
• Have some, but not all, characteristics of public goods.
• Partially non-excludable and partially non-rivalrous.
The Problem with Public Goods:
In a free market, public goods may not be produced even if people want them.
The Free Rider Problem:
People benefit without paying no incentive for private firms.