Central Economic Problems

Explore the field of Economics definitions by learning more about the issue of scarcity prepared by JC Economics Tutor Simon Ng from EconomicsFocus, which is also known as the Central Economic Problem. Scarcity is an economic problem due to the limited resources and unlimited wants. As such, individuals, firms and governments are required to make choices, which is known as resource allocation. Making decisions will incur opportunity costs, which are seen in terms of the next best alternative forgone.

economics tuition notes definition

Definition

What is scarcity?

- Scarcity is the fundamental economic problem of having unlimited human wants and needs in a world of limited resources.

What causes the problem of scarcity?

-The fact that there are insufficient productive resources to fulfill all human needs and wants is the problem with scarcity.

Why scarcity cannot be eradicated?

-There is a limited amount of resources in the world eg. Coal. Hence it is impossible to eradicate scarcity due to the shortage of resources which requires effective allocation.

How to address the problem of scarcity?

-To address the problem of scarcity, the government can allocate resources, like land, raw materials etc, productively through management policies.

What is opportunity cost?

-In microeconomic theory, the opportunity cost of a choice is the value of the next best alternative forgone, in a situation in which a choice needs to be made between several mutually exclusive alternatives given limited resources.

Why is there opportunity cost?

-Because of scarcity, every time we do one thing we necessarily have to forgo doing something else desirable. So there is an opportunity cost to everything we do, and that cost is expressed in terms of the most valuable alternative that is sacrificed.

What is utility?

-Utility is a representation of preferences over some set of goods and services.

What does marginal utility mean?

-The marginal utility of a good or service is the gain (or loss) from an increase (or decrease) in the consumption of that good or service.

What is a capital good?

-A capital good (sometimes simply capital in economics) is a durable good that is used in production of goods or services

What are the factors of production?

-Factors of production are the inputs that are wounded to the production process. For example, land, capital, labour are all factors of production.

What is the Production Possibility Curve (PPC)?

-A PPC is a graph that shows the maximum attainable combinations of output that can be produced in an economy within a specified period of time, when all the available resources are fully and efficiently employed, at a given state of technology.

What is increasing opportunity cost?

-Increasing opportunity cost is reflected in a concave PPC to the origin. This means that as more of a good is produced, larger and larger quantities of the alternative good must be sacrificed.

What is constant opportunity cost?

-This happens when factors of production are perfectly suitable in the production of both goods. Constant opportunity cost is reflected in a straight line PPC.

What is decreasing opportunity cost?

-This means that as more of a good is produced, smaller and smaller quantities of the alternative good is sacrificed.

What causes the production possibility curves to shift outward?

-increase in quantity/quality of resources -technological improvement

What causes the production possibility curves to shift inward?

-decrease in quantity/quality of resources

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