1.1.1 The Economic Problem Flashcards
Scarcity
There is limited availability of useful resources
Scarce resource
Anything useful which is not available in unlimited quantities
Opportunity cost
the value of the next best alternative forgone (The best alternative given up when something is chosen)
Trade off
Where you find a balance between 2 choices: having more of one and less of the other
Goods and services
Products directly consumed by individuals to satisfy their desires
Economic goods
Scarce goods that have an opportunity cost
Free goods
Goods that have no opportunity cost
Durable Goods
A good that lasts and can be used multiple times
Consumer goods
A good that has only one used (ie food)
Factors of production
Elements needed to produce the desired output
Entrepreneur
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
what is the fundamental economic problem
how to satisfy unlimited wants with limited resources
how do we tackle the economic problem
choices must be made to decide how to use finite resources to best effect when our wants are effectively limited
what is economics (3)
- the ‘Science of choice’
- It concerns human behaviour, which fluctuates
- It simplifies assumptions and builds up theoretical models.
renewable resources
can be used and replaced (solar, wind etc)
non-renawable resources
will never be replaced once they are used (coal, oil etc)
sustainable resources
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)
explain the problem of scarcity (3)
- 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.
explain choices made by consumers, businesses and governments (4)
- 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
what is a fundamental choice made within the economy
HOW resources should be allocated
how are resources allocated? |(3)
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
how do economists think CONSUMERS make choices (2)
- 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
how do economists think PRODUCERS make choices (3)
- 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
POSITIVE economics (2)
- dealing with facts that can be tested
- testable as factual or false, normally on the basis of observation and evidence
NORMATIVE economics (2)
- statements about the economy that depend on opinion and judgment
- involve ideas on what SHOULD be done
politics and NORMATIVE statements (3)
- 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.
