1.1 - The Economic Problem

Question 1

What are Economic goods?

Answer 1

Goods which benefit society, have the problem of scarcity and have an opportunity cost. Since economic goods are scarce, they have some value, so consumers will pay for them, and they can be traded.

Question 2

What are Free goods?

Answer 2

Goods which have no opportunity cost, because there is no scarcity of the good. For example, air and water are free goods. These goods are not traded because they are freely available.

Question 3

What is the Basic Economic problem?

Answer 3

How we go about allocating scarce resources

Scarcity - Unlimited wants but finite resources

Question 4

What are positive statements?

Answer 4

Objective statements. They can be tested with factual evidence, and can consequently be rejected or accepted.

Question 5

What are normative statements?

Answer 5

Statements which are based on value judgements. These are subjective and based on opinion rather than factual evidence.

Question 6

What are the 4 factors of production?

Answer 6

Capital, Enterprise, Labour, Land (CELL)

Question 7

What is Capital? What is the reward/incentive?

Answer 7

“Physical: goods which can be used in the production process.
Fixed: Machines; buildings.Working: finished or semi-finished consumer goods. Reward is the intrest from the investment.
“

Question 8

What is Enterprise? What is the reward/incentive?

Answer 8

“Managerial ability. The entrepreneur is someone who takes risks, innovates, and uses the factors of production. Resources are drawn together into the production process.
The reward is profit, an incentive to take risks.”

Question 9

What is Labour? What is the reward?

Answer 9

Human capital, which is the workforce of the economy. The reward is wages for the work.

Question 10

What is Land? What is the reward?

Answer 10

Natural resources such as oil, coal, wheat, water. It can also be the physical space for fixed capital. The reward is rent.

Question 11

What is the environment?

Answer 11

A scarce resource.

Question 12

What are renewable resources?

Answer 12

Resources that can be replenished, they are sustainable.

Question 13

What are non-renewable resources?

Answer 13

Resources which cannot be replenished and are therefore not sustainable

Question 14

What does sustainable mean?

Answer 14

Meets the needs of the present, without compromising the needs of the future - does not deplete the stock of capital over time (including environmental capital).

Sustainable - renewable eg wind air and water power rather than fossil fuels

Question 15

What are the economic agents?

Answer 15

Government, Firms, Households

Question 16

What is the Government’s purpose in an economy?

Answer 16

Assumed to act on behalf of the consumers.

Question 17

What is the firm’s purpose in an economy?

Answer 17

They exist to maximise profits. They may have different objectives, such as to maximise social welfare or to help the environment.

Question 18

What is the Household’s purpose in an economy?

Answer 18

They make decisions about how to spend their limited resources. Usually. they choose to maximise the utility of their finite resources.

Question 19

What is Microeconomics

Answer 19

The study of the behaviour of individuals, firms and Govts in relation to the allocation of products and or resources

Question 20

What is Macroeconomics

Answer 20

The study of the behaviour and performance of an economy as a whole

Question 21

What is rationality

Answer 21

Assumption that each economic agent acts in their own best interests
Households aim to maximize their own satisfaction
Firms aim to maximise their profit
Govts aim to maiximise welfare

Question 22

What is a free market ?

Answer 22

A free market is one where there is no govt intervention where producers decide how much they produce, for whom and at what price

Question 23

What does rationality mean ?

Answer 23

Households aim to maximise their own satisfaction

Firms aim to maximise their profit

Govts aim to maximise welfare