1.1.3 The Economic Problem

Question 1

What is the basic economic problem?

Answer 1

The basic economic problem is about scarcity and choice i.e. economics is about coming up with ways to
meet infinite wants when faced with finite resources.

Question 2

What questions must society answer?

Answer 2

• What goods and services to produce?
• How best to produce goods and services?
• Who is to receive goods and services?

Question 3

What are examples of questions concerning what to produce?

Answer 3

Does the economy use its resources to build more hospitals, roads, schools or luxury hotels? Can the National Health Service afford free IVF treatment for childless couples or offer new but expensive cancer treatments? How should we source our energy in the years to come?

Question 4

What are examples of questions concerning how to produce goods and services?

Answer 4

What is the best use of our scarce resources? Should
government land be sold off to provide more land for affordable housing? Should we subsidize the electric
vehicles as a strategy to reduce carbon emissions from transport?

Question 5

What are examples of questions concerning who is to receive goods and services?

Answer 5

Who will get hospital treatment - and who not? Which areas get the go-ahead for major transport infrastructure projects such as CrossRail, HS2 and HS3 and which regions might miss out?

Question 6

Explain the concept of scarcity.

Answer 6

We are always uncovering new wants and needs. Because of scarcity / finite resources, all consumers,
businesses and governments must make choices. For example, five million people travel into London each
day, they make decisions about when to travel & whether to use the bus, tube, walk or cycle or work from
home.

Question 6

How can emerging technologies change our perception of scarcity?

Answer 6

Emerging technologies might be changing our perception of scarcity, for example open access to the internet & freely-available services such as Google, Twitter, Instagram & Facebook. These services are free to use but there is an opportunity cost involved (i.e. what else we could have been doing with our time) – for example the productive hours lost when people become addicted to social media on a daily basis.

Question 7

What are the factors of production?

Answer 7

Question 8

Explain land as an FoP

Answer 8

The stock of natural (environmental) factor resources available for production.
This is any natural resource so this could, for example, include the sea or oil.

Question 9

Explain labour as an FoP

Answer 9

the quantity and quality of the human input into the production process.

Question 10

Explain capital as an FoP

Answer 10

goods made by people that are used to supply other products e.g. machines, technology,
factories, plant and software.

Question 11

Explain enterprise as an FoP

Answer 11

entrepreneurs organise factors of production and also take risks when seeking to exploit
market opportunities.

Question 12

What are capital goods?

Answer 12

These are goods that are used to make consumer goods and services. Capital inputs include plant and machinery, hardware, software, new factories and other buildings. Capital also includes working capital e.g. stocks of finished products and component parts (intermediate products).

Question 13

What is automation?

Answer 13

Automation is a production technique that uses capital machinery / technology to replace or enhance human
labour. Replacing labour is known as capital-labour substitution. There have been many recent examples, for example robots in Amazon warehouses and grocery suppliers such as Ocado, that carry out “picking and
packing”.

Question 14

What are non renewable resources?

Answer 14

• Non-renewable resources are finite in supply
• With crude oil, coal, natural gas and other fossil fuels, no mechanisms exist at present to replenish
  them at a rate that is faster than the rate of consumption
• The rate of extraction of finite resources depends in part on the current market price

Question 15

What are renewable resources?

Answer 15

• Renewables are replaceable if the rate of extraction is less than the natural rate at which a resource
  renews
• Examples of renewable resources are solar energy, tidal power, oxygen, biomass, fish stocks and
  forestry

Question 16

What is opportunity cost?

Answer 16

“cost of the alternative that is given up / foregone, when a choice is made”

Question 17

How can work leisure choices be an example of opportunity cost?

Answer 17

The opportunity cost of deciding not to work an extra 10 hours is the lost wages foregone. If you are being paid £8 per hour to work in a shop, if you take a day off you could lose £80 of income before tax.

Question 18

How can opportunity cost be included as evaluation?

Answer 18

“Should the government choose to increase spending on higher education, then the opportunity cost may be that there is less money available to spend on primary or secondary education, assuming that the government doesn’t borrow more.”