1.1 The economic problem Flashcards
Introduction to Microeconomics
What is the basic economic problem?
The problem of scarcity, people have unlimited wants in the face of limited resources therefore choices must be made.
Leading to the problem of how to allocate the scarce resources
What are the four factors of production?
Land, Labour, Capital and Entrepreneurship
What are free goods?
A good with zero opportunity cost; it can be produced by society in as much quantities as needed with little or zero effort. They aren’t scarce
What are some examples of free goods?
- Air
- Water
- Intellectual ideas
- By-products (something that is made accidentally when making something else)
When is something not a free good?
When there is a cost to make it
What is an economic good?
A good with an opportunity cost; it takes tome and resources to produce. They are scarce
What is a positive statement?
A statement about what is i.e. can be tested against the facts
What is a normative statement?
A statement about what ought to be i.e. depend on values, cannot be tested against facts
What is a household, what do they do and what’s their aim?
- A person
- They make choices about what goods/services to buy
- They aim to maximise satisfaction (utility)
What is a firm, what do they do and what’s their aim?
- A business
- They make choices about what goods/services to produce
- They aim to maximise profits but it’s different for each business
What do governments do and what’s their aim?
- Make choices about types of taxation, how much to tax, how to spend tax revenue and how to regulate markets
- They aim to maximise welfare for society
What is land? Including examples of land and the reward
All natural physical resources e.g. water, oil, natural gas, forests etc.
The reward is rent
What is labour? Including examples of labour and the reward
Human input into production e.g an artist producing a painting. The reward is salary
What is capital? Including examples of capital and the reward
Manmade goods used to produce other consumer goods/services e.g. tools
The reward is interest
What is entrepreneurship? Including examples of entrepreneurship and the reward
An individual who seeks to supply products to a market for a rate of return e.g. smart phones
The reward is profits
