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1. Central Problem of Economics

1. Central Problem of Economics

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Published by Vernon
H2 Economics notes for GCSE A Levels
H2 Economics notes for GCSE A Levels

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Published by: Vernon on Feb 06, 2011
Copyright:Attribution Non-commercial


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Central Problem of Economics
1. Introduction to Economics
- Economics is the study of how scarce resources are allocated to the productionof goods and services to maximize the unlimited wants human beings desire- With the knowledge of economics,- Individuals maximize satisfaction and minimize expenses- Businesses allocate resources more efficiently, maximizing profit- Government provide better standard of living for people- Microeconomics focuses on small econ groups like individual households, firmsand industries and how they make decisions related to production and profit- Macroeconomics focuses on a wider view of the economy, emphasizing issuesfaced by the whole economy, like inflation, unemployment and econ growth
2. Scarcity Choice and Resource Allocation
- Scarcity refers to the situation where supply < demand- Limited resources in these areas:- Natural Resources like coal- Financial constraint like money- Factors of Production like land, capital and labour - Time and energy- Opportunity cost is the gain you will have if you chose the opposing factor instead of the chosen factor 
3. Basic Economic Problems
- Goods that should be produced [should take into account consumer sovereignity(what consumers want)]- Method of production and amount to produce [should take into accounteconomic efficiency (cheapest method of production)]- Target consumers
4. Application of Concept of Opportunity Cost
- Production Possibility Curve (PPC)- It shows the possible combinations of 2 goods that an economy can produce at acertain time given a limited amount of resources and at a certain level of technology,assuming that all factors of production are fully employed and the economy can only produce two goods at any time- Points on the PPC represents that the resources are fully utilized and there is fullemployment when any of those combinations of goods are chosen- Combinations within the curve are attainable with the resources and technologyavailable, but these combinations do not fully utilize resources nor at full employment- Combinations out of the curve are unattainable with the resources andtechnology available, and can only be attained when there is more resources or a higher level of technology to produce- Concave PPC – Increasing Opportunity Cost (In order to produce an additionalunit of Good X, more units of Good Y has to be sacrificed) (Generally the case becauseas you produce more of one good, the tradeoff increases due to external factors)- Straight-line PPC – Constant Opportunity Cost (Both goods are perfectsubstitutes of each other; they are equally desirable)- Convex PPC – Decreasing Opportunity Cost (In order to produce an additionalunit of Good X, less units of Good Y has to be sacrificed)- Movement along the PPC = relocation of resources in terms of combination of goods produced- Shift in PPC = change in production capacity due to an advancement intechnology, increased efficiency in production and increased availability of resources
5. Economic Efficiency
- For this to occur, there must be no wastage of resources and full employment of resources- Vilfredo Pareto (1848-1932) stated the Pareto optimality, a situation wheneconomic resource and output have been allocated in such a way that no one can be better off without making someone else worse off - Economic efficiency can be divided into 4 groups:- Productive Efficiency(Goods are produced at lowest cost possible)- Allocative Efficiency(Economy is at full employment and fully utilized all resources)- Technical Efficiency(Least amount of input to produce a given amount of output)- Social Efficiency(Social marginal benefit = Social marginal cost)

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