Lecture Notes 1 (Central Problem of Economics)

Point on PPC

All resources are efficiently and fully used to achieve maximum output.

PPC -- Productive Efficiency

Firms producing maximum output at least average cost

Opportunity Costs -- Firms

Firms' main objective is to maximise profits. Total Profits = Total Revenue - Total Costs Where Total Costs = Explicit Costs + Implicit Costs Explicit Costs: direct/obvious (opportunity to spend on something else other than purchased product) Implicit Costs: implied/hidden (opportunity to gain something else from already owned/purchased. E.g. Owning a plot of land, but having the chance to sell it and gain money from it)

Economic Agents

I. Individuals/Households II. Firms III. Governments

What are the four resources (AKA Factors of Production)?

Land: Natural resources (land, minerals, fish, etc) Labour: Human effort (physical and mental) Capital: Man-made resources (Machinery, building, vehicles) Entrepreneurship: Human effort that risks bringing CELL together to produce goods and services *Can be memorised as CELL (capital, entrepreneurship, land, labour)

Opportunity Cost

Measures sacrifice by considering cost in terms of best alternative forgone. (E.g. #1: You have two options: staying at home to sleep and hanging out with friends. Say you decide to stay at home. The opportunity cost would be the fun time you COULD HAVE had being with your friends. E.g. #2: You have $10. You have the option to buy new music or to buy two books. You decide to buy music. The opportunity cost would be the enjoyment of the two books since you're missing out on that by choosing to buy music.)

Point within PPC

There is... Unemployment: not all resources used in production of goods/services Underemployment: resources operating below production capacity (E.g. A taxi driver w/ Master's degree)

Production Possibility Curve (PPC)

Used to illustrate concepts of scarcity, choice and opportunity cost. It shows maximum alternative combinations of two goods which economy can produce when given quantity and quality of resources are used fully and efficiently at given state of technology.

Point outside PPC

Concept of scarcity: economy cannot produce assuming quantity and quality of resources are fixed and constant technology. Only achievable when.... - Quantity of resources increase - Efficiency/Quality of resources increases/improves (E.g. improve/increased usage of technology)

Benefits and Costs of Division of Labour & Specialisation?

Benefits: - Workers become more skilled at task through repetition ==> improvement of productivity - Specialised work ==> Higher wages Costs: - Boredom of same task ==> Output of terrible quality - Narrow skill set ==> detrimental as workers will not be able to easily transfer to performing other tasks

PPC -- Allocative Efficiency

Combination of goods produced and sold give maximum satisfaction for each consumer

Shape of PPC?

Concave

Why does the PPC slope downwards?

One good must be forgone to obtain more of another.

Central Problem of Economics?

Scarcity: a) Limited/Scare resources b) Unlimited Wants

What is Economics

Social science that studies how society allocates its scarce resources