1.1 The economic problem Flashcards
Define Economic Goods
Goods that have an opportunity cost, for example take time and resources to produce, and are scarce, so have value meaning consumers will pay for them, and can therefore be traded.
Define Free Goods
Goods that 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 Economic Problem in Terms of Scarcity
There are unlimited wants in the face of limited resources.
What is a want
A thing people would like to consume eg a cinema ticket
What is a need
Needs are necessary to sustain human life eg air and food
Why does the economic problem occur
No country can allocate all of its finite resources to meet all of societies wants (some can’t even meet needs).
Limited resources- factors of production
What are free goods
A free good is a good with zero opportunity cost. This means it can be produced in society in as much quantities as needed with little or 0 effect. Free goods are not scarce.
Eg: air, water, byproducts (eg heat released from a recycling plant)
What is an economic good
A good with an opportunity cost so takes time and resources to produce. Economic goods are scarce, most goods fall into this category.
Why are some “free” goods not free?
Some goods, such as the NHS, may be free at the point of use but are not a free good as we have to pay the doctor through taxes. It has an opportunity cost.
What is the economic problem
The fundamental problem is scarcity, as people have unlimited wants but there are limited resources.
As a result, choices have to be made leading to the problem of how to allocate these scarce resources amongst competing uses (what goods and services, for who, and how resources are used to produce them).
What are choices and how do they relate to the economic problem?
Choices made by individuals- what goods and services to consume
Choices made by firms- what goods and services to produce
Choices made by governments- how to make the best use of its resources eg budget
(what, for whom, and how finite resources are used to make them)
What is economics the study of?
How to allocate resources in the most effective way.
What is a positive statement
A statement about what is, so about facts.
It can be right or wrong.
It can be tested against the facts.
What is a normative statement
A statement involving a value judgement that is about what ought to be.
They are subjective and cannot be tested.
Define micro economics
Study of economic decisions taken by individual economic agents inc households and firms.
Focuses on individual markets eg market for oil.
What are the economic agents?
Households
Firms
Governments
What do households do?
Households make choices about their expenditure (what goods and services to buy)
To do this they need income so they make decisions about where to supply their labour
What objectives do households have?
Households aim to maximise satisfaction (utility) from their expenditure and income from working (supplying labour)
What are firms
Firms make choices about what goods and services to produce, the production techniques they’ll use (how many workers to employ, how much land they need to rent and the prices they sell at)
What are the objectives for firms
Firms aim to maximise profit.
What are governments
Governments make choices about types of taxation and how much to tax, how to spend tax revenue, and how to regulate markets.
This incorporates the need to ensure stability of the economy (meet environmental targets, avoid excessive unemployment)
What are the objectives of governments
They aim to maximise welfare for society
What are the factors of production (definition)
Resources people use to produce goods and services, they are the building blocks of the economy.
What are the factors of production
Land
Labour
Capital
Entrepreneurship
What is land
Land is all natural physical resources eg fertile farm land, wind power or solar power (and other forms of renewable energy).
Reward- rent income to owners.
What is labour
Labour is the human input into production, eg supply of workers available and their productivity.
An increase in the size and quantity of labour is vital if a country wants economic growth.
Rewards- wages
What is capital
Capital goods are used to produce other consumer goods and services in the future.
Fixed capital includes machinery, equipment, new technology, factories and other buildings. Can improve labour.
Working capital is the stock of finished and semi finished goods or components that will be consumed or made into consumer goods in the future.
Reward- interest from savings and dividends from shares
What is infrastructure
Part of capital
Includes road and rail networks, airports and docks, telecommunications and cables and satellites to improve web access.
What is entrepreneurship
Organise factors of production and take risks.
Individual who supplies products to a market to make profit.
Entrepreneurs will often invest their own financial capital in a business and take on risks.
Reward- profit made
