1.1.3 The economic problem

Question 1

Problem of scarcity and solution

Answer 1

The ​basic problem of economics is that of scarcity​. People have ​finite needs​, but ​infinite wants​, as no one would choose to live at the level of basic human living standards if they can enjoy more. Although wants are infinite, ​resources are finite and limited​.
- Scarcity is a ​relative concept as resources are not necessarily scarce in themselves but they are ​scarce in relation to the demands placed upon them​.
Example: Water in India and China and ​food shortages around the world.
Solution: Economies try to solve the basic economy problem by working out ​what to produce​, how to produce it​ and ​for whom production should take place.

Question 2

Renewable resources

Answer 2

Resources of economic value that can be replenished or replaced on a level equal to consumption. For example, ​oxygen, solar power and fish are renewable.
- As long as the rate of consumption is less than or equal to the rate of replenishment, the stock will not decrease.

Question 3

Non-renewable resources

Answer 3

Resources of economic value that cannot be readily replaced by natural means on a level equal to consumption. This includes ​fossil fuels such as coal, oil and gas.

Question 4

Opportunity costs

Answer 4

• The same resources ​cannot be used to produce different goods at the same time so decisions have to be made on how to use them, this leads to the opportunity cost. The limited amount of resources allied to the unlimited wants means that choices have to be made.
  The opportunity cost is the ​cost of one thing in terms of the next best option which has been given up.
• For example, if you go into a shop with £1, you can only buy a chocolate bar or a bag of crisps. If you chose the chocolate bar, the opportunity cost is the bag of crisps that you could not buy due to your limited resources.

Question 5

Importance of opportunity costs to economic agents: Consumers

Answer 5

Consumers will make choices on how to use their limited income based on what gives them the greatest level of satisfaction.

Question 6

Importance of opportunity costs to economic agents: Producers

Answer 6

Producers must choose what to do with their limited resources and their decisions will be based on profit.

Question 7

Importance of opportunity costs to economic agents: Government

Answer 7

The government must make decisions on where they should spend their limited tax revenues based on what will maximise social welfare. There is no opportunity cost for free resources.

Question 8

Factors of production

Answer 8

Resources are split into the four factors of production:
1) Land
2) Labour
3) Capital
4) Entrepreneurship
Different industries will need to combine the factors of production in different combinations:
some are labour intensive e.g. construction, education; some are land intensive e.g. farming; and some are capital intensive e.g. manufacturing.

Question 9

Land

Answer 9

All natural resources used in production, such as raw materials, minerals, land and produce of the sea. Owners receive rent from land or sums of money from the sale of land.

Question 10

Labour

Answer 10

All productive human effort, both physical and mental, paid or unpaid. The value of a worker is their human capital. Labourers receive wages.

Question 11

Capital

Answer 11

Refers to all man-made resources that are used to produce goods or services in the future. Owners of capital receive interest on their land.

Question 12

Entrepreneurship

Answer 12

The willingness and ability to take the risks of combining the other three factors of production in order to make a product or service. Successful entrepreneurs earn a profit from their activities.