1.1 The Economic Problem Flashcards
What are economic goods
Economic goods benefit society, have the problem of scarcity and have an opportunity cost. Since they are scarce, they have some value, so consumers will pay for them, and they can be traded.
Define free goods with examples
Free goods 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.
What is the basic economic problem
The basic economic problem is scarcity. Wants are unlimited and resources are finite, so choices have to be made. Resources have to be used and distributed optimally.
Define scarcity
Scarcity refers to the shortage of resoucres in relation to the quantity of human wants.
Give an example of scarcity
If you only have £1 and you go to the shop, you can buy either the chocolate bar or the packet of crisps. The scarcity of the resource means a choice has to be made between the two.
What is a positive statement and what words do you need to look for
Positive statements are objective. They can be tested with factual evidence, and can consequently be rejected or accepted.
Look for words such as ‘will’ and ‘is’
Give an example of a positive statement
Raising the tax on alcohol will lead to a fall in demand of alcohol and a fall in the profits of pub landlords
What is a normative statement and what words shoudk you look out for
Normative statements are based on value judgements. These are subjective and based on opinion rather than factual evidence
Look for words such as ‘should’
Give an example of a normative statement
The government should increase the tax on alcohol
Define economic agents and state the three economic agents
Economic agents play a role in the economy. It is assumed that economic agents only act in their own interests
Government, Firms, Households
Why is the government considered an economic agent
Governemtns are assumed to axt on behalf of consumers. They intervene in the economy.
For example, they might provide health care and education
Why are firms considered an economic agent
It is assumed that firms aim to maximise their profits. This is the reward entrepreneurs receive for taking risks and making investments.
Why are households considered an economic agent
Households have to make decisions about how to spend their limited resources.
Define a consumers utility
The total satisfaction received from consuming a good or service
What are the four factors of production
Land
Labour
Captial
Enterprise
Give a description of capital and the reward
Goods which can be used in the production process such as machines and buildings
Reward: interest from the investment
Give a description of enterprise and the reward
The entrepreneur is someone who takes risks, innovates, and uses the factor of production.
Reward: profit
Give a description of land and the rewards
Natural resources such as oil, coal, wheat, water.
Reward: Rent
Give a description of labour and the reward
Human capital, which js the workforce of the economy
Reward: wages
What are renewable resources
They are resources that can be replenished, so the level of the resources can be maintained over a period of time
Give an example of a renewable resource
Commodities such as oxygen, fish, or solar power
What are non-renewable
They cannot be renewed. There are only finite resources, and this scarcity means the resource is unsustainable
Give an example or a non-renewable resource
Things produced from fossil fuels such as coal, oil and natural gas
What is an inuition decision
One that uses the feelings or instincts of the consumer and does now use facts
What is a rational decision
One made using several steps, and involved analysis and facts
What are the 8 steps of The Rational Decision Making Model
- Identify the problem
- Find and identify the decision criteria
- Weigh the criteria
- Generate alternatives
- Evaluate alternative options
- Choose the best alternative
- Carry out the decision
- Evaluate the decision
What are the limitations of rational decision making
This is not always the best or most realistic way for firms to make decisions. Although it might be fairer than making an intuitive decision, it takes significantly longer to decide, which is not practical in a firm with strict time constraints
