1.1 The Economic Problem

Question 1

What are economic goods

Answer 1

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.

Question 2

Define free goods with examples

Answer 2

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.

Question 3

What is the basic economic problem

Answer 3

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.

Question 4

Define scarcity

Answer 4

Scarcity refers to the shortage of resoucres in relation to the quantity of human wants.

Question 5

Give an example of scarcity

Answer 5

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.

Question 6

What is a positive statement and what words do you need to look for

Answer 6

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’

Question 7

Give an example of a positive statement

Answer 7

Raising the tax on alcohol will lead to a fall in demand of alcohol and a fall in the profits of pub landlords

Question 8

What is a normative statement and what words shoudk you look out for

Answer 8

Normative statements are based on value judgements. These are subjective and based on opinion rather than factual evidence

Look for words such as ‘should’

Question 9

Give an example of a normative statement

Answer 9

The government should increase the tax on alcohol

Question 10

Define economic agents and state the three economic agents

Answer 10

Economic agents play a role in the economy. It is assumed that economic agents only act in their own interests

Government, Firms, Households

Question 11

Why is the government considered an economic agent

Answer 11

Governemtns are assumed to axt on behalf of consumers. They intervene in the economy.

For example, they might provide health care and education

Question 12

Why are firms considered an economic agent

Answer 12

It is assumed that firms aim to maximise their profits. This is the reward entrepreneurs receive for taking risks and making investments.

Question 13

Why are households considered an economic agent

Answer 13

Households have to make decisions about how to spend their limited resources.

Question 14

Define a consumers utility

Answer 14

The total satisfaction received from consuming a good or service

Question 15

What are the four factors of production

Answer 15

Land
Labour
Captial
Enterprise

Question 16

Give a description of capital and the reward

Answer 16

Goods which can be used in the production process such as machines and buildings

Reward: interest from the investment

Question 17

Give a description of enterprise and the reward

Answer 17

The entrepreneur is someone who takes risks, innovates, and uses the factor of production.

Reward: profit

Question 18

Give a description of land and the rewards

Answer 18

Natural resources such as oil, coal, wheat, water.

Reward: Rent

Question 19

Give a description of labour and the reward

Answer 19

Human capital, which js the workforce of the economy

Reward: wages

Question 20

What are renewable resources

Answer 20

They are resources that can be replenished, so the level of the resources can be maintained over a period of time

Question 21

Give an example of a renewable resource

Answer 21

Commodities such as oxygen, fish, or solar power

Question 22

What are non-renewable

Answer 22

They cannot be renewed. There are only finite resources, and this scarcity means the resource is unsustainable

Question 23

Give an example or a non-renewable resource

Answer 23

Things produced from fossil fuels such as coal, oil and natural gas

Question 24

What is an inuition decision

Answer 24

One that uses the feelings or instincts of the consumer and does now use facts

Question 25

What is a rational decision

Answer 25

One made using several steps, and involved analysis and facts

Question 26

What are the 8 steps of The Rational Decision Making Model

Answer 26

1. Identify the problem
2. Find and identify the decision criteria
3. Weigh the criteria
4. Generate alternatives
5. Evaluate alternative options
6. Choose the best alternative
7. Carry out the decision
8. Evaluate the decision

Question 27

What are the limitations of rational decision making

Answer 27

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