1.1.2 The basic economic problem

Question 1

Basic economic problem

Answer 1

Scarcity - infinite wants and needs but finite resources

Question 2

What is assumed with the basic economic problem?

Answer 2

People are rational and choose the options which maximises utility

Question 3

Consumers seek to maximise…

Answer 3

Utility

Question 4

Firms seek to maximise…

Answer 4

Profits

Question 5

Governments seek to maximise…

Answer 5

Welfare

Question 6

What are needs?

Answer 6

Things required for survival
e.g. food, shelter

Question 7

What are wants?

Answer 7

Things that are desirable, but not necessary for survival.

e.g. smartphones, cars, holidays

Question 8

What are goods?

Answer 8

Physical products you can touch, such as washing machines, books or tables.

Question 9

What are services?

Answer 9

Intangible things such as medical check-ups, teaching or train journeys.

Question 10

What are the different economic agents?

Answer 10

• Producers / firms
• Consumers
• Governments

Question 11

What are the three fundamental economic questions?

Answer 11

1) What to produce?
2) How to produce it?
3) Who to produce it for?

Question 12

Define renewable resource

Answer 12

A resource which replenishes itself at the rate at which it is being used

Question 13

Define non-renewable resource

Answer 13

A resource that is limited in supply

Question 14

Name examples of renewable resources

Answer 14

Solar energy, Wind and Oxygen

Question 15

Opportunity cost

Answer 15

The value of the next best alternative foregone

Question 16

The Importance of Opportunity Costs to Economic Agents

Answer 16

Consumers:
Consumers make choices about spending money and time
Producers:
Opportunity cost influences production decisions, like choosing which products to manufacture, ( which could maximise profits)
Governments:
Governments allocate budgets to various programmes and policies, (which could be done for greater good or political reasons)

Question 17

What are some of the problems with opportunity cost?

Answer 17

• Often, not all alternatives are known
• Some factors don’t have alternative uses
• There may be a lack of information on alternatives and their costs
• Some factors (e.g. land) can be hard to switch to an alternative use

Question 18

What is a free good?

Answer 18

A good without any opportunity cost.

• For example, if you breathe air, it doesn’t reduce the amount available to other people – there is no opportunity cost.

Question 19

How does opportunity cost relate to comparative advantages?

Answer 19

The theory of comparative advantage states that countries should specialise in producing goods where they have a lower opportunity cost.

Question 20

Examples of opportunity cost

Answer 20

• If you invest £1million in developing a cure for pancreatic cancer, the opportunity cost is that you can’t use that money to invest in developing a cure for skin cancer.
• If the government spends $800bn on a war, it is $800bn they cannot spend on education, health care or cutting taxes.
• If the government build a new road, then that money can’t be used for alternative spending plans, such as education and healthcare.
• If the government offers an income tax cut, the opportunity cost is that government revenue cannot be used to finance some aspect of government spending.