MR. GORDON
FLETCHER’S
AS ECONOMICS (9708)
SUMMARIZED NOTES
,BASIC ECONOMIC IDEAS
•The fundamental economic problem is that
there are scarce resources to satisfy the
unlimited wants and needs of the people. This
es
gives rise to the problem of how to allocate
resources between competing ends i.e.,
ot
• what to produce - capital goods or consumer
goods
N
• how to produce - capital intensive or labor
intensive
ic
• for whom to produce goods and services –
rich or poor.
m
All economic agents –individuals, firms and
no
organizations and governments have to make
choices i.e. decision to have one good instead of
o
another.
Without the condition of scarcity, there would be
Ec
no need to consider the different ways in which
resources could be allocated.
Choices are made from a scale of preference.
n's
Every choice involves opportunity, or real cost -
the value of the next best alternative foregone.
do
Production Possibility Frontier: Shows the
maximum output of two types of products that
or
can be produced with a given amount of
resources and technology.
G
• A production point on the curve represents full
use of resources.
,• Any point inside the curve indicates
unemployed resources i.e., resources are not
being utilized efficiently.
• Any point outside the curve currently
unattainable.
es
• A shift to the right of a PPC is caused by an
increase in the quantity or quality of resources.
ot
• A change in the slope of a PPC will occur if the
ability to produce only one of the two products
N
alters.
• Useful to demonstrate economic growth and
ic
opportunity cost.
m
o no
Ec
n's
do
or
PPC is usually convex to the origin due to
the law of diminishing returns.
G
As resources are transferred from Good A to
Good B, the extra output of B becomes
successively smaller, whilst the amounts
, being sacrificed in A become successively
larger.
• Assume a country can produce two types of
goods with its resources – capital goods and
consumer goods.
es
• If it devotes all resources to capital goods it
could produce a maximum of Ym.
ot
• If it devotes all its resources to consumer
goods it could produce a maximum of Xm.
N
• If it reallocates its resources (moving round
the PPF from A to B) it can produce more
ic
consumer goods but only at the expense of
fewer capital goods.
m
• The opportunity cost of producing an extra
Xo – X1 consumer goods is Yo – Y1 capital
no
goods.
If the country is at point A on the PPF it can
o
produce the combination of Yo capital goods
and Xo consumer goods.
Ec
A straight line PPC indicates a constant
n's
opportunity cost; as resources are transferred
from one good to another, the amount of output
sacrificed by one good and gained by the other
do
is constant.
or
G
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