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Unit 1: Microeconomics
Prelim exam
Final exam
assessment
Internal
explain the basic economic problem.
explain the meaning of scarcity.
explain with examples the meaning of opportunity cost as
it is faced by individuals, firms and governments.
describe the choices (what, how, for whom) faced by
different economic systems.
describe three different types of economic system (see also
Topic 3 in Unit 2: The Role of Government in the Economy).
classify resources/factors of production and describe their
characteristics.
explain the meaning of economic efficiency and why
countries seek to achieve it.
explain the meaning of substitution of resources.
explain the meaning of geographical and occupational
mobility of resources.
describe measures to increase the substitution and mobility
of resources.
and in addition for Higher, you should be able to:
explain how substitution of resources and mobility of
resources may contribute to improved economic efficiency.
explain the term potential output.
draw production possibility curves.
calculate opportunity costs from production possibility
figures or curves.
explain the factors which may shift a production possibility
curve.
explain the term equity.
UNIT 1
1 Scarcity
1.2 Scarce goods and free goods. Scarce goods, also called economic
goods, are those which have a price, i.e. something has to be
sacrificed to obtain them. Free goods are those goods of which
there is enough to satisfy everyone’s wants, e.g. fresh air, sea
water. Free goods have no price. All scarce goods have an
opportunity cost whereas free goods do not.
2.3 In economics we assume that people are rational, i.e. when faced
with a choice they will always choose the alternative that will give
them the greatest satisfaction. This involves weighing up all the
alternatives and then choosing the one that has the lowest
opportunity cost.
3.2 Land refers to all the gifts of nature and includes not only land
itself, but also all the minerals in and on the land, the sea and
everything in the sea, the air, sunlight, etc.
4 Mobility of resources
4.1 Modern industrial economies are dynamic. This means that they
are in a continual state of change. Changing consumer demands
and changing production methods mean that some industries will
be growing, e.g. electronics, finance while others are declining,
e.g. coal, shipbuilding. In such a world there is a need for
resources to be mobile – to be able to change their location or
their use. Resources which cannot change either their location or
their use run the risk of becoming unemployed.
4.2 Factor or resource mobility is the speed and ease with which a
resource can move from place to place (geographical mobility) or
can change use (occupational mobility).
4.3 In practice there are obstacles to factor mobility and to ensure that
resources are used efficiently these obstacles need to reduced.
5 Economic efficiency
5.1 All countries have the problem of scarce resources and so should
find ways of making best use of them. Best use of resources is
called economic efficiency.
Example
In building a bridge, using the least amount of steel while ensuring
the bridge will not collapse. Building a bridge strong enough to
take 1000-ton lorries would be wasting steel, which could be used
for making other products.
Example
One hundred bridges could be built over the River Don in
Aberdeen in a technically efficient way, but this would be a wasteful
use of resources if consumers don’t want 100 bridges. The
resources could have been used to make products which
consumers want more.
(c) when all resources are employed. Idle resources will result
in lost output.
6 Equity
7 Economic systems
7.1 All nations face the problem of scarcity, i.e. they have insufficient
resources to produce all the goods and services which their
citizens need and want. Three basic questions have to be
addressed:
9 Free-market economy
Higher only
11.2
Capital goods
Consumer goods
11.3 Points on the curve are possible if all existing resources are being
fully and efficiently employed, i.e. if resources are being used in a
technically efficient way. If the economy is producing at a point
inside the curve then it is producing less than it could. This could
be because some resources are unemployed, or because some
resources are being used inefficiently. Points outside the curve are
not possible because the economy does not have the productive
capacity. Given that any point on the curve represents a technically
efficient use of resources, an economy still has to make the
decision about which combination of goods to produce.
Remember that to use resources in an economically efficient way,
the combination chosen must be that which satisfies most wants.
Capital goods
Consumer goods
11.5 A production possibility curve (PPC) can also show the opportunity
cost of a change in production, e.g. the opportunity cost of
increasing the production of consumer goods from OD to OF is EG
capital goods.
Capital goods
Consumer goods
11.6 The usual PPC curves outwards from the origin because the
opportunity cost of producing one good usually increases as more
of it is produced. This is because more resources are required to
produce each extra unit. Notice that as more consumer goods are
produced the opportunity cost in terms of lost capital goods
increases.
Capital goods
Consumer goods
Capital goods
Consumer goods