summary principles of economics exam
revision paper
Topic 1 – ‘The Economic Problem’,
Economic Definitions, Ppf Illustrated,
Demand.
Consumption Goods/Services: Goods/Services Purchased By Individuals To
Improve Their Standards Of Living.
Capital Goods: Goods Purchased By A Business To Increase Their Productive
Resources.
Factors Of Production: -
• Land – Any Natural Resource, Such As Minerals, Water, Air, Wild
Plants, Animals, Forest & Farmland.
• Labor – A Persons Work Time And Effort. Quality Of Labor Depends
On Human Capital. Human Capital Is Influenced By Knowledge And
Skill, Obtained Through Education, Training And Experience.
• Capital – Any Piece Of Equipment Which Is Used To Produce Goods
And Services. Things Such As Tools, Instruments, Machines And Even
Buildings.
• Entrepreneurship – The Human Resource That Organizes Land, Labor
And Capital.
Production Possibilities Frontier - The Boundary Between The
Combinations Of Goods And Services That Can Be Produced And The
Combinations That Cannot Be Produced, Given The Available Factors Of
Production And The State Of Technology.
, Production Possibilities All Depends On Various Factors, As Listed Below.
Production Possibilities Assumption:
• Fixed Resources
• Full Employment/Use Of Resources
• Two Products Only: Capital Good And Consumer Good.
Production Possibilities Frontier Successfully Illustrates Attainable
And Unattainable Combinations, Efficient And Inefficient
Production, Tradeoff And Free Lunches.
Attainable And Unattainable Combinations
Because The Ppf Shows The Limits To Production, It Separates Attainable
Combinations From Unattainable Ones.
,Product Efficiency Is The Situation In Which Production Of A Good Cannot Be
Raised, Unless Production Of Another Good Is Lowered.
, Tradeoff – An Exchange, Giving Something Up To Get Something Else.
Free Lunch – A Gift, Getting Something For Nothing.
.Opportunity Cost – The Cost Of The Best Alternative Foregone. Using The
Analogy Of Phones And Dvd’s Once Again, The Opportunity Cost Of A Mobile
Phone Is The Decrease In Quantity Of Dvd’s, Divided By The Increase In The
Number Of
Mobile
Phones As
We Move
Along The
Production
Possibilities
Frontier
(Ppf). The
Following
Graph Will
Illustrate It.
The
Opportunity Cost Increases As More Mobiles Are Produced.
revision paper
Topic 1 – ‘The Economic Problem’,
Economic Definitions, Ppf Illustrated,
Demand.
Consumption Goods/Services: Goods/Services Purchased By Individuals To
Improve Their Standards Of Living.
Capital Goods: Goods Purchased By A Business To Increase Their Productive
Resources.
Factors Of Production: -
• Land – Any Natural Resource, Such As Minerals, Water, Air, Wild
Plants, Animals, Forest & Farmland.
• Labor – A Persons Work Time And Effort. Quality Of Labor Depends
On Human Capital. Human Capital Is Influenced By Knowledge And
Skill, Obtained Through Education, Training And Experience.
• Capital – Any Piece Of Equipment Which Is Used To Produce Goods
And Services. Things Such As Tools, Instruments, Machines And Even
Buildings.
• Entrepreneurship – The Human Resource That Organizes Land, Labor
And Capital.
Production Possibilities Frontier - The Boundary Between The
Combinations Of Goods And Services That Can Be Produced And The
Combinations That Cannot Be Produced, Given The Available Factors Of
Production And The State Of Technology.
, Production Possibilities All Depends On Various Factors, As Listed Below.
Production Possibilities Assumption:
• Fixed Resources
• Full Employment/Use Of Resources
• Two Products Only: Capital Good And Consumer Good.
Production Possibilities Frontier Successfully Illustrates Attainable
And Unattainable Combinations, Efficient And Inefficient
Production, Tradeoff And Free Lunches.
Attainable And Unattainable Combinations
Because The Ppf Shows The Limits To Production, It Separates Attainable
Combinations From Unattainable Ones.
,Product Efficiency Is The Situation In Which Production Of A Good Cannot Be
Raised, Unless Production Of Another Good Is Lowered.
, Tradeoff – An Exchange, Giving Something Up To Get Something Else.
Free Lunch – A Gift, Getting Something For Nothing.
.Opportunity Cost – The Cost Of The Best Alternative Foregone. Using The
Analogy Of Phones And Dvd’s Once Again, The Opportunity Cost Of A Mobile
Phone Is The Decrease In Quantity Of Dvd’s, Divided By The Increase In The
Number Of
Mobile
Phones As
We Move
Along The
Production
Possibilities
Frontier
(Ppf). The
Following
Graph Will
Illustrate It.
The
Opportunity Cost Increases As More Mobiles Are Produced.
