Chapter 1 · Microeconomics
Scarcity and Economic Resources
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Key Definitions
- Scarcity
- The excess of human wants over what can be produced with the resources available.
- Factors of production
- The resources used to produce goods and services: Land, Labour, Capital and Entrepreneurship.
- Opportunity cost
- The next best alternative forgone when a choice is made.
- Marginalist principle
- Decisions are taken by comparing marginal benefit (MB) with marginal cost (MC); act while MB is greater than MC.
Core Concepts
The factors of production
- Land: natural resources.
- Labour: human effort.
- Capital: man-made inputs used in production.
- Entrepreneurship: takes risks, mobilises the other factors, and drives innovation.
The three fundamental questions
- What and how much to produce.
- How to produce.
- For whom to produce.
Law of diminishing marginal utility
- As more of a good is consumed, the extra satisfaction from each additional unit falls.
- This underpins the downward-sloping demand curve.
Diagram Notes
The PPC shows the maximum combinations of two goods producible with full and efficient employment of all resources at a given state of technology. A point on the curve is productively efficient; one point on it is also allocatively efficient. A point inside the curve shows productive inefficiency, such as unemployment or underemployment. A point outside the curve is unattainable.
An outward shift of the PPC reflects potential growth from more or better factors: more labour, land, capital or entrepreneurship, better factor quality through education, and technological progress and R&D. An inward shift follows disasters, war or a poor work environment.