Introduction to Microeconomics Test - 3

The four factors of production are inputs used in various combinations for the production of goods and services to make an economic profit. The factors of production are land, labor, capital, and entrepreneurship. They are the inputs needed for supply.

Human wants are unlimited but resources or means to satisfy them are limited. They are material and non- material goods like time, money, services, resources etc. These resources are scarce. Here the term scarcity is used not in the absolute sense but in the relative sense i.e., in relation to demand.

Economic theory the ideas and priniciples that aim to describe how economies work. 

Normative economics. Normative economics (as opposed to positive economics) is a part of economics that expresses value or normative judgments about economic fairness or what the outcome of the economy or goals of public policy ought to be.

A decision-making unit (DMU) is an individual - a group of individuals  who are participants in a decision-making process, who share a common goal or goals which the decision will hopefully help them to achieve and who share the risk arising from the decision.

The Production Possibilities Curve (PPC) models a two-good economy by mapping production of one good on the x-axis and production of the other good on the y-axis. The combinations of outputs produced using the best technology and all available resources make up the PPC. Points inside the PPC result from inefficiency; output combinations outside the PPC are impossible to produce.

P.P.C. is concave to the origin due to increase in marginal rate of transformation.

Economic cost is the combination of losses of any goods that have a value attached to them by any one individual. Economic cost is used mainly by economists as means to compare the prudence of one course of action with that of another.

Through  central planning  because it is the  Central  Authority which directly  solves  the  central problems  of 'what, how and for whom to produce 'by incorporating  solution  in the  plan  itself. the PPC, the opportunity cost increases.The second method which can be employed to solve the central problems is the adoption of economic planning.

There are two main methods to solve these central problems. The first method is to solve these problems through market or price mechanism. That is, what goods are to be produced and what quantities, which methods for production are to be employed for the production of goods and how the output is to be distributed, should be decided by the free play of the forces of demand and supply.
The second method which can be employed to solve the central problems is the adoption of economic planning.