1.1 The Economic Problem

Question 1

What are Economic Goods?

Answer 1

-Have the problem of scarcity
-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

What are Free Goods?

Answer 2

-Have no opportunity cost
-No scarcity for the good
-These goods aren’t/cannot be traded because they are freely available. E.g. Water and air

Question 3

What is the Basic Economic Problem?

Answer 3

Wants are unlimited and resources are finite

Question 4

What is Scarcity?

Answer 4

Scarcity refers to the shortage of resources in relation to the quantity of human wants

Question 5

How is scarcity/economic problem tackled?

Answer 5

Choices must be made on how resources should be used and allocated optimally

Question 6

What are Positive Statements?

Answer 6

Positive statements are objective. They can be tested with factual evidence and can consequently be rejected or accepted

Question 7

What are Normative Statements?

Answer 7

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

Question 8

Who are the 3 economics agents?

Answer 8

-Government
-Firms
-Households

Question 9

What is a government?

Answer 9

A government is a group of people that has the power to run a country and they make and enforce rules within that country which can affect producers and consumers in a country

Question 10

How do governments affect the economy?

Answer 10

-Governments affect the economy with many of their policies and these may influence price, quantity or quality of a good or service
-Regulates economic activity through imposing regulations on producers and consumers as well as using taxation and government spending

Question 11

What is believed to be the government’s main objective?

Answer 11

To maximise the social welfare of its citizens

Question 12

Evaluation of government’s behaviour/objectives

Answer 12

Government decisions may be taken based on imperfect information or may be influenced by political considerations and so they may not always act rationally and take the best possible decision

Question 13

What is a firm?

Answer 13

Firms are generally producers, who produce goods and services, using inputs(factors of production)

Question 14

How do firms affect the economy?

Answer 14

Firms(also called producers) make choices about what and how they produce, and have influence over the price, quantity and quality of the good they produce

Question 15

What is believed to be a firm’s main objective?

Answer 15

It is generally assumed that firms aim to maximise profits and profits are the reward that entrepreneurs get for taking risks and making investments (to bring land, labour and capital together)

Question 16

Evaluation of firm’s behaviour/objectives

Answer 16

• Some firms might have different objectives, which might involve maximising social welfare or helping the environment
• Some firms might have philanthropic owners who seek to maximise the utility of others

Question 17

What is a household/consumer?

Answer 17

A consumer buys goods or services for their own personal use rather than for use in production

Question 17

How do households/consumers affect the economy?

Answer 17

-Consumers make choices about their spending, deciding whether it is worthwhile to buy a good and to make this decision consumers weigh up their benefits or the satisfaction gained from using a good against the price they would have to pay to obtain it

-Households can be providers of factors of productions and receive factor payments from firms(households receive wages provision of labour). Households also provide the risk takers(enterprise) and the owners of natural resources used in production(land)

Question 18

Evaluation of household’s/consumer’s objectives

Answer 18

-Households/consumers may not always act in their own best interests as they may choose to donate to charity or spend time helping others

-They may also be enticed into spending on goods and services that they do not really want or do not make full use of a good or service

Question 18

What is believed to be a household’s/consumer’s main objective

Answer 18

Consumers choose the option which maximises their utility(a consumer’s utility is the total satisfaction received from consuming a good or service)

Question 19

What are the 4 Factors of Production?

Answer 19

Resources used in the production process, or inputs into production, which are:
-Land
-Labour
-Capital
-Enterprise

Question 19

What is Capital?

Answer 19

Man-made goods that are used to produce other goods and services(eg. factories, offices, railways, machinery)

Question 20

What is Enterprise?

Answer 20

Risk takers(entrepreneurs) who organise the other economic resources(FoP) to facilitate production, bearing the risk of doing so

Question 21

What is Land?

Answer 21

All natural resources used in the production of goods and services

Question 22

What is Labour?

Answer 22

All human effort, physical and mental used in the production of goods and services

Question 23

What are the 4 factor payments

Answer 23

-Wage
-Rent
-Interest
-Profit

Question 24

What are Wages?

Answer 24

Wage is the reward(factor payment) for labour that households supply

Question 25

What is Interest?

Answer 25

Interest is the reward(factor payment) for capital

Question 26

What is Rent?

Answer 26

Rent is the reward(factor payment) for land

Question 27

What is Profit?

Answer 27

Profit is the reward for risk-taking(factor payment to enterprise)