Central economic problem
Definitions
Productive efficiency
Minimise the resources required in order to produce goods and services
Maximise the benefits that producers and consumers obtain
Allocative efficiency
Maximise swelfare to the society
Positive economy
Based on pure economic theory
Normative economy
Value judgement is involved
Opportunity cost
Opportunity cost is the net benefit derived from next highest ranked choice foregone.
1. Scarcity
# Humans have unlimited want
individuals want to obtain maximum utility/ enjoy maximum goods more than what their
purchasing power can buy
firms have unlimited wants as they want to obtain maximum profits more than their
resources allow
governments want to make available to the people goods and services more than what its
resources allow.
# Resources are finite
Land refers to all natural resources found on Earth including marine life, land and minerals.
They are exhaustible.
Labour refers to the amount of human effort that an individual who are willing to able to
work. although one’s willingness to work varies among people, all of us have limit of 24 hours per
day
Capital refers to man-made resources that further production such as machinery and
infrastructure. They are limited as land is limited.
Entrepreneurship refers to the human effort that brings resources required for production
and services together to earn profits. They are risk takers.
# Hence decisions need to be made
Rational decision-makers base their decisions on how to maximise self-interest. (maximise
return)
individuals maximise utility
firms maximise profits
governments maximise social welfare
2. Decision-making process
The aim is to achieve the best outcome within the constraints
How to make decisions
# Consider several factors
1. Constraints
such as capital, time
2. Cost and benefits
rational decision makers weigh the cost and benefits and compare them
cost includes monetary cost and non-monetary cost as well as opportunity cost
benefit refers to non-monetary benefit, monetary benefit which are subject to economic
agents
3. Information
accurate and timely information is needed to make decisions. Sources of information
include statistics, survey data, reports.
4. Perspectives
there are multiple economic agents involved
any decision by a single economic agent will impact on other economic agents
their subsequent actions will in turn affect the intended outcomes
economic agents do not live in isolation with each other
Weigh the cost and benefits of choices and alternatives
Rank the choices and alternatives
Rationally choose the option that gives the best return
# Timely review
When economic agents are unable to achieve their intended outcome with these decisions, their
decisions need to be reviewed and changed.
Both internal and external factors count.
Internal factors include the perspectives of economic agents, information and constraints
External factors include the external economic environment
What are decisions to make
Marginal principle
Marginal cost refers to the cost associated with each additional unit of goods produced
Marginal benefit refers to the increase in total benefit due to consumption/production of additional
unit of good.
Application:
If the marginal benefit of a decision exceeds marginal cost of that, that decision should be made.
If marginal cost equals to the marginal benefit, maximum total net benefit is reached.
Concerns over decisions
1. The types of products
there are two types of goods: capital goods which can further production in the future and
consumer goods which improve current well-being
there is a clash between future economic growth and current well-being as resources are
finite.
trade-offs are incurred and require value judgements
2. The process of production
every country differs to each other in terms of their resources
capital-intensive methods and labour-intensive methods differ from each other
For example, Singapore may choose capital-intensive methods due to lack of natural
resources. China may prefer labour-intensive methods due to abundant workforce
3. The benefactors of products
there are two major methods of allocation: rationing and market forces which involved
price mechanism
price mechanisms are based on aim to maximise self-interest
consumers will signal their demands through price mechanism and producers respond to
that signal and hence decide what products to produce and how to produce.
Production possibility curve
The curve shows the different combinations of products derived from a fix amount of resources
and constant level of technology available.
PPC is used to explain the opportunity cost, choice and scarcity
Opportunity cost
The negative gradient shows that opportunity costs arise when certain amount of resources are
devoted to make other products.
The ever steeper gradient is because of the nature of resources. Since all resources are not
perfect substitutes to one another, some resources may not be best utilised when the product
types are changed.
Opportunity cost is increasing as more resources are devoted to produce the same product.
Scarcity
Points on PPC that are beyond the curve shows circumstances when the goals are unattainable
due to constraint of resources.
Choice
There are multiple combinations of two goods, which show that they are multiple possible choices
to make.
PPC involves certain assumptions
The economy produces two types of products only
The level of technology and amount of resources available are constant.
All resources (Labour and natural resources) are fully utilised.
Points lying within the PPC shows that resources are not fully utilised.
PPC demonstrates unemployment and economic growth
Unemployment
When points on PPC diagram are below the curve, the economy is said to experience
unemployment of resources.
Recession cause fall in national output. Firms produce less goods and services due to the
decreasing demand since consumers buy less products with decreasing household income.
Naturally, full employment is impossible.
Shifting from within PPC to points on PPC symbolises both reduction in employment rate and
economic growth since the amount of either products increase.
PPC shifts because of external factors
Factors that cause the change in PPC
1. Quality of resources
2. Quantity of resources
3. Change in the level of technology
E.g. When Thailand experiences flood, the total amount of resources available decreases
Infrastructure are damaged and labour shrinks
Hence the economy’ producing capacity decreases
PPC shifts inwards
When Singapore enjoys technological advancement
the level of technology increases
the productive capacity of Singapore increases
PPC shifts outwards
Singapore is said to enjoy potential growth
PPC shifting is influenced by choices
There are two types of goods: investment goods and consumption goods
Consumption goods are consumed by households to satisfy their needs and wants, leading to
higher standard of living.
Investment goods are man-made goods which further production hence contribute to economic
growth and future economic growth. Expenditure on it is termed as investment.
Trade-offs arise due to the clash between improvement of current SOL and future SOL.
