Economics Principles: Scarcity and PPF

Questions and Answers

What do economists mean by scarcity?

They mean that unlimited wants exceed limited resources.

Are food, time, gas, and workers considered scarce by economists?

False

What is the Production Possibilities Frontier?

It shows the maximum attainable combinations of two goods that may be produced with available resources.

How is economic efficiency shown?

By points on the production possibilities frontier. Signup and view all the answers

How is economic inefficiency shown?

By points inside of the production possibilities frontier. Signup and view all the answers

What will cause the Production Possibilities Frontier to shift outward?

If technological advances occur. Signup and view all the answers

What is meant by Comparative Advantage?

The ability of an individual, firm, or a country to produce a good or service at a lower opportunity cost than competitors. Signup and view all the answers

What does the circular flow diagram illustrate?

It shows how households and firms are linked through product and factor markets. Signup and view all the answers

What are the two main categories of participants in markets?

Firms and Households. Signup and view all the answers

Which participants in markets are of greatest importance in determining what goods and services are produced?

Households. Signup and view all the answers

What does Capital refer to?

Goods used to produce other goods. Signup and view all the answers

In a circular flow diagram showing how a market system works, what flows to firms?

Income flows to firms through product markets. Signup and view all the answers

What do economists call the inputs used to make goods and services?

Factors of Production. Signup and view all the answers

Why is scarcity central to economics?

Because it implies that every choice involves an opportunity cost. Signup and view all the answers

What is meant by the statement about economics assuming rationality?

Economics assumes that consumers and firms are rational, not that they always make the right decisions. Signup and view all the answers

When economists develop models designed to explain choices, what do they generally assume?

People are rational. Signup and view all the answers

What does economists mean by the word 'Marginal'?

Extra or additional. Signup and view all the answers

An optimal decision occurs when marginal benefits equal what?

Marginal costs. Signup and view all the answers

What do economists believe about continuing an activity?

An activity should be continued up to the point where the marginal benefit from the activity is equal to the marginal cost. Signup and view all the answers

What are the three economic questions every society must answer?

<ol> <li>What goods will be produced? 2. How will these goods be produced? 3. For whom will these goods be produced?</li> </ol> Signup and view all the answers

Centrally planned economies allocate resources based on what?

Decisions made by Government. Signup and view all the answers

Market economies answer three economic questions through what?

Decisions made by Households and Firms. Signup and view all the answers

What does productive efficiency mean?

A good/service is produced at lowest possible cost. Signup and view all the answers

What does allocative efficiency mean?

Every good/service is produced up to the point where marginal benefit is equal to marginal cost. Signup and view all the answers

What does efficiency mean in economic terms?

Goods are distributed in a way that maximizes benefits to society. Signup and view all the answers

What does equity mean?

Goods are distributed in a way that is fair. Signup and view all the answers

Why do centrally planned economies seem to be less efficient?

They don't give great incentives for hard work and innovation. Signup and view all the answers

Relative to a market economy, a centrally planned economy would be expected to be better at what?

Better at neither productive or allocative efficiency. Signup and view all the answers

What is opportunity cost?

The highest valued alternative that must be given up to engage in an activity. Signup and view all the answers

Trade-offs force society to make choices particularly when answering what?

What to produce?, How?, For whom? Signup and view all the answers

In a market system, what determines how goods and services will be produced?

Firms determine this. Signup and view all the answers

Study Notes

Scarcity

Scarcity occurs when unlimited wants exceed limited resources, central to the study of economics.
Food, time, gas, and workers are not considered scarce resources by economists.

Production Possibilities Frontier (PPF)

The PPF illustrates the maximum attainable combinations of two goods that can be produced with available resources.
Economic efficiency is represented by points on the PPF, while inefficiency is shown by points inside the frontier.
Technological advances can cause the PPF to shift outward, indicating increased production capacity.

Comparative Advantage

Comparative advantage refers to the ability of an individual, firm, or country to produce a good or service at a lower opportunity cost than competitors.

Circular Flow Diagram

The circular flow diagram represents how households and firms interact through product and factor markets.
Participants in markets are categorized as firms and households, with households playing a crucial role in determining production of goods and services.

Capital and Factors of Production

Capital consists of goods used to produce other goods.
Inputs used to create goods and services are termed factors of production.

Opportunity Cost

Scarcity implies that every choice comes with an opportunity cost, representing the highest valued alternative forgone.

Rational Decision-Making

Economic models assume individuals act rationally, aiming to maximize benefits while minimizing costs.
Optimal decisions occur when marginal benefits equal marginal costs.

Economic Questions

Societies must address three fundamental economic questions:
- What goods will be produced?
- How will these goods be produced?
- For whom will these goods be produced?

Economic Systems

Centrally planned economies allocate resources through governmental decisions, often lacking incentives for hard work and innovation, leading to inefficiencies.
Market economies answer essential economic questions through the decisions of households and firms, promoting competition and efficiency.

Efficiency and Equity

Productive efficiency is achieved when goods/services are produced at the lowest possible cost.
Allocative efficiency occurs when the production of goods/services meets the point where marginal cost equals marginal benefit.
Overall efficiency maximizes societal benefits, whereas equity ensures fairness in the distribution of goods.

Trade-offs and Choices

Trade-offs compel societies to make choices when addressing the three key economic questions.
In a market system, firms decide how goods and services will be produced, influencing resource allocation and efficiency in production.

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Description

This quiz covers essential economics principles such as scarcity, production possibilities frontier (PPF), comparative advantage, and the circular flow diagram. Discover how these concepts illustrate the interaction of resources, production capabilities, and market dynamics in economics.