1.1 The Economic Problem Flashcards
What are Economic Goods?
-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
What are Free Goods?
-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
What is the Basic Economic Problem?
Wants are unlimited and resources are finite
What is Scarcity?
Scarcity refers to the shortage of resources in relation to the quantity of human wants
How is scarcity/economic problem tackled?
Choices must be made on how resources should be used and allocated optimally
What are Positive Statements?
Positive statements are objective. They can be tested with factual evidence and can consequently be rejected or accepted
What are Normative Statements?
Normative statements are subjective and are based on value judgements. These are based on opinion rather than factual evidence
Who are the 3 economics agents?
-Government
-Firms
-Households
What is a government?
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
How do governments affect the economy?
-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
What is believed to be the government’s main objective?
To maximise the social welfare of its citizens
Evaluation of government’s behaviour/objectives
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
What is a firm?
Firms are generally producers, who produce goods and services, using inputs(factors of production)
How do firms affect the economy?
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
What is believed to be a firm’s main objective?
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)
Evaluation of firm’s behaviour/objectives
- 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
What is a household/consumer?
A consumer buys goods or services for their own personal use rather than for use in production
How do households/consumers affect the economy?
-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)
Evaluation of household’s/consumer’s objectives
-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
What is believed to be a household’s/consumer’s main objective
Consumers choose the option which maximises their utility(a consumer’s utility is the total satisfaction received from consuming a good or service)
What are the 4 Factors of Production?
Resources used in the production process, or inputs into production, which are:
-Land
-Labour
-Capital
-Enterprise
What is Capital?
Man-made goods that are used to produce other goods and services(eg. factories, offices, railways, machinery)
What is Enterprise?
Risk takers(entrepreneurs) who organise the other economic resources(FoP) to facilitate production, bearing the risk of doing so
What is Land?
All natural resources used in the production of goods and services
What is Labour?
All human effort, physical and mental used in the production of goods and services
What are the 4 factor payments
-Wage
-Rent
-Interest
-Profit
What are Wages?
Wage is the reward(factor payment) for labour that households supply
What is Interest?
Interest is the reward(factor payment) for capital
What is Rent?
Rent is the reward(factor payment) for land
What is Profit?
Profit is the reward for risk-taking(factor payment to enterprise)
