Fundamental Economic Theories & Concepts

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• Pure market systems are free of government intervention. Price mechanism is how the three questions are answered which makes the consumer soveriegn.  Price acts as a signal, rationing device and incentive and can transfer preference. Firms respond to increased demands to achieve profits. The invisible hand. Assumption is consumers aim to maximise utility

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• 100% government influence and the 3 questions are attempted to be answered by them. Failed experiments in Soviet Union and China - Communists. No consumer or producer soveriegnity. Government decides what, how and for whom the produce goes to. Profit is not an objective. Factories get production targets.

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• Blend of market and planned economies. Quantity varies massively. Most ecnonomies are mixed. Most efficient as benefits of both government intervention and market forces.

1. Next best alternative foregone when a choice is made
   1. The Production Possibility Frontier (PPF)

      Annotations:

      • A curve depicting all maximum output possibilities for two or more goods given a set of inputs (resources, labor, etc.).  The PPF assumes that all inputs are used efficiently.

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• If our country can produce some set of goods at lower cost than a foreign country, and if the foreign country can produce some other set of goods at a lower cost than we can produce them, then clearly it would be best for us to trade our relatively cheaper goods for their relatively cheaper goods. In this way both countries may gain from trade.
• The theory of comparative advantage states that if countries specialise in producing goods where they have a lower opportunity cost – then there will be an increase in economic welfare.

Attachments:

• Opportunity Cost and Comparative Advantage

1. What is it?

Attachments:

• The price system