1.1.3 The economic problem Flashcards
Barter
The practice of exchanging one good or service for another without using money.
Example: Trading a bushel of apples for a dozen eggs.
Basic economic problem
There are infinite wants but finite factor resources with which to satisfy them.
Example: The scarcity of resources leads to the need for economic choices.
Capital goods
Producer or capital goods such as plant (factories) and machinery and equipment are useful not in themselves but for the goods and services they can help produce in the future. Distinguished from ‘financial capital’, meaning funds which are available to finance the production or acquisition of real capital.
Example: Investing in new machinery to increase production efficiency.
Constraints
Limits to what we can afford to consume - we have to operate within a budget and therefore must make choices from those sets that are feasible/affordable. There is always a set of conceivable things that are actually available, and another set of that are not.
Example: A consumer deciding between buying a new phone or going on a vacation.
Economic agent
A participant in an economic system - be it a consumer, business or the government.
Example: A government setting policies to regulate the economy.
Entrepreneur
An entrepreneur is an individual who seeks to supply products to a market for a rate of return (i.e. a profit). Entrepreneurs will often invest their own financial capital in a business and take on the risks associated with a business investment.
Example: Starting a new tech company to bring innovative products to the market.
Factor incomes
Factor incomes are the rewards to factors of production. Labour receives wages and salaries, land earns rent, capital earns interest and enterprise earns profit.
Example: A worker receiving a monthly salary for their labor.
Factors of production
Factors of production are the inputs available to supply goods and services: Land, Labour, Capital, Enterprise, Know-how.
Example: Land being used to grow crops for food production.
Finite resources
There are only a finite number of workers, machines, acres of land and reserves of oil and other natural resources on the earth. By producing more for an ever-increasing population, we may destroy the natural resources of the planet.
Example: Depletion of fossil fuels due to excessive consumption.
Free goods
Free goods do not use up any factor inputs when supplied. Free goods have a zero-opportunity cost i.e. the marginal cost of supplying an extra unit of a free good.
Example: Air and sunlight are examples of free goods.
