1.1 The economic problem

Question 1

Define Economic Goods

Answer 1

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.

Question 2

Define Free Goods

Answer 2

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.

Question 3

What is The Economic Problem in Terms of Scarcity

Answer 3

There are unlimited wants in the face of limited resources.

Question 4

What is a want

Answer 4

A thing people would like to consume eg a cinema ticket

Question 5

What is a need

Answer 5

Needs are necessary to sustain human life eg air and food

Question 6

Why does the economic problem occur

Answer 6

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

Question 7

What are free goods

Answer 7

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)

Question 8

What is an economic good

Answer 8

A good with an opportunity cost so takes time and resources to produce. Economic goods are scarce, most goods fall into this category.

Question 9

Why are some “free” goods not free?

Answer 9

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.

Question 10

What is the economic problem

Answer 10

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).

Question 11

What are choices and how do they relate to the economic problem?

Answer 11

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)

Question 12

What is economics the study of?

Answer 12

How to allocate resources in the most effective way.

Question 13

What is a positive statement

Answer 13

A statement about what is, so about facts.
It can be right or wrong.
It can be tested against the facts.

Question 14

What is a normative statement

Answer 14

A statement involving a value judgement that is about what ought to be.
They are subjective and cannot be tested.

Question 15

Define micro economics

Answer 15

Study of economic decisions taken by individual economic agents inc households and firms.
Focuses on individual markets eg market for oil.

Question 16

What are the economic agents?

Answer 16

Households
Firms
Governments

Question 17

What do households do?

Answer 17

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

Question 18

What objectives do households have?

Answer 18

Households aim to maximise satisfaction (utility) from their expenditure and income from working (supplying labour)

Question 19

What are firms

Answer 19

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)

Question 20

What are the objectives for firms

Answer 20

Firms aim to maximise profit.

Question 21

What are governments

Answer 21

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)

Question 22

What are the objectives of governments

Answer 22

They aim to maximise welfare for society

Question 23

What are the factors of production (definition)

Answer 23

Resources people use to produce goods and services, they are the building blocks of the economy.

Question 24

What are the factors of production

Answer 24

Land
Labour
Capital
Entrepreneurship

Question 25

What is land

Answer 25

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.

Question 26

What is labour

Answer 26

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

Question 27

What is capital

Answer 27

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

Question 28

What is infrastructure

Answer 28

Part of capital
Includes road and rail networks, airports and docks, telecommunications and cables and satellites to improve web access.

Question 29

What is entrepreneurship

Answer 29

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