Introduction Test - 2

Economics is the study of how societies use scarce resources to produce valuable commodities and distribute them among different people. Behind this definition there are two key ideas in economics: that goods are scarce and that society must use its resources efficiently.

Four key assumptions of PPC are:

Only two goods can be produced, Full employment of resources, Fixed resources and Fixed technology

A PPC can be a straight line only if the marginal rate of transformation is constant throughout the curve. A MRT can remain constant only if both the commodities are equally constant only if both the commodities are equally constant and the marginal utility derived from their production is also constant.

Technology means the correct proportion in which the different factors of production are to be employed. There are two types of techniques. A labour-intensive technique would employ relatively more labour and less capital. On the other hand, capital- intensive technique means more capital and less labour.

MRT increases in absolute size as one moves from the top left of the PPF to the bottom right of the PPF. Production Possibility Curve is concave to the origin because to produce each additional unit of good X, more and more unit of good Y is to be sacrificed. Opportunity cost of producing every additional unit of good A tends to increase in terms of the loss of production of good Y. It is so because factors of production are not perfect substitute of each other.

The Productin Possibility Frontier (PPF) is a curve depicting all maximum output possibilities for two goods, given a set of inputs consisting of resources and other factors. The PPF assumes that all inputs are used efficiently.

What to produce refers to a problem in which decision regarding which goods and services are to be produced is to be taken. Since its resources are limited, every economy has to decide what commodities are to be produced and in what quantities.

A planned economy is "an economic system in which the government controls and regulates production, distribution, prices, etc."

The production possibilities frontier (PPF) is a model that can be used to illustrate scarcity, tradeoffs, opportunity costs and the benefits of specialization and trade.Production points inside a PPF indicate the economy is either not using all of its resources or is using them inefficiently.

Opportunity cost refers to a benefit that a person could have received, but gave up, to take another course of action. Stated differently, an opportunity cost represents an alternative given up when a decision is made.