1.1.1 The Economic Problem

Question 1

Scarcity

Answer 1

There is limited availability of useful resources

Question 2

Scarce resource

Answer 2

Anything useful which is not available in unlimited quantities

Question 3

Opportunity cost

Answer 3

the value of the next best alternative forgone (The best alternative given up when something is chosen)

Question 4

Trade off

Answer 4

Where you find a balance between 2 choices: having more of one and less of the other

Question 5

Goods and services

Answer 5

Products directly consumed by individuals to satisfy their desires

Question 6

Economic goods

Answer 6

Scarce goods that have an opportunity cost

Question 7

Free goods

Answer 7

Goods that have no opportunity cost

Question 8

Durable Goods

Answer 8

A good that lasts and can be used multiple times

Question 9

Consumer goods

Answer 9

A good that has only one used (ie food)

Question 10

Factors of production

Answer 10

Elements needed to produce the desired output

Question 11

Entrepreneur

Answer 11

An individual who seeks to supply products to a market for a rate of return (ie. profit).
They usually invest their own financial capital in a business and take on the risks associated with a business environment

Question 12

what is the fundamental economic problem

Answer 12

how to satisfy unlimited wants with limited resources

Question 13

how do we tackle the economic problem

Answer 13

choices must be made to decide how to use finite resources to best effect when our wants are effectively limited

Question 14

what is economics (3)

Answer 14

• the ‘Science of choice’
• It concerns human behaviour, which fluctuates
• It simplifies assumptions and builds up theoretical models.

Question 15

renewable resources

Answer 15

can be used and replaced (solar, wind etc)

Question 16

non-renawable resources

Answer 16

will never be replaced once they are used (coal, oil etc)

Question 17

sustainable resources

Answer 17

used up at the same rate at which they are renewed
(If sustainable resources are
managed well they are renewable, but if managed poorly they are non-renewable)

Question 18

explain the problem of scarcity (3)

Answer 18

• Human needs are unlimited
• resources are finite so when we use them in particular ways they are not available for other purposes.
• choices need to be made.

Question 19

explain choices made by consumers, businesses and governments (4)

Answer 19

• Consumers base choices on personal preferences, income constraints, and opportunities they face.
• As consumers we decide what to buy and how to allocate time.
• Businesses and governments also face choices
• Scarcity tends to be more of a problem for individuals with relatively low incomes

Question 20

what is a fundamental choice made within the economy

Answer 20

HOW resources should be allocated

Question 21

how are resources allocated? |(3)

Answer 21

What do we choose to make? → depends on what the consumer prefers and wants and they show the producer this by demanding goods using their purchasing power

How do we choose to make it? → producers seek profits and aim to minimise production costs

Who is it for? → whoever has the greatest purchasing power in the economy and is able to buy the good

Question 22

how do economists think CONSUMERS make choices (2)

Answer 22

• assumes that consumers are rational decision makers and act in a way that maximises their SATISFACTION
• Consumers use their limited income to buy the combination of goods and services that yield the highest possible level of SATISFACTION

Question 23

how do economists think PRODUCERS make choices (3)

Answer 23

• assumes that producers are rational decision makers and act in a way that maximises their WELFARE
• They use limited resources to produce goods or services to yield the highest possible level of PROFITS
• In reality many businesses pursue objectives different from pure profit maximisation

Question 24

POSITIVE economics (2)

Answer 24

• dealing with facts that can be tested
• testable as factual or false, normally on the basis of observation and evidence

Question 25

NORMATIVE economics (2)

Answer 25

• statements about the economy that depend on opinion and judgment
• involve ideas on what SHOULD be done

Question 26

politics and NORMATIVE statements (3)

Answer 26

• many pol issues are strongly NORMTIVE
• Party policies are usually based on beliefs on what SHOULD happen, DESPITE ALL THE EVIDENCE that politicians so often refer to
• Even where a choice of policy is bound to be a matter of opinion, TRADE-OFFS (comprimise) have a strong factual element.