1.1.3 The economic problem Flashcards
Describe the difference between Needs and Wants
Needs are limited and people know that they must be satisfied if they want to survive. Whereas, Wants are unlimited or infinite and everyone will always want more of but dont actually require them to survive.
Define a Free Good
Resources which are not scarce in quantity.
Define a Economic Good
Resources which are scarce in quantity.
Define the Basic Economic Problem
This is where resources are scarce but wants are infinite. In economics, we study how we can manage the allocation of these resources.
Define the concept of Opportunity Cost
This is the benefit lost from the next best alternative.
An economy is a system which attempts to solve…
the basic economic problem of opportunity cost
Define the 4 factors of production
Land - Natural resources available for production
Labour - The human input into the production process
Enterprise - Entrepreneurs organise factors of production and take risks.
Capital - Goods used in the supply of other products. For example, tech.
What are the four factor rewards?
Land - Rental income to owners of land
Labour - Wages and salaries from employment
Enterprise - Profits
Capital - Interest from savings + dividends from shares
Define non-renewable resources
Non renewable resources are finite in supply.
Examples of this are: plastics, crude oil, coal, natural gas and other fossil fuels. Also no methods exist to replenish them.
What does the rate of extraction of finite sources depend on?
This depends on the current market price.
For example, businesses with rights to extract will have a greater incentive to do so when prices are high because of the profit motive.
Define renewable resources
These are resources which are replaceable over time if the rate of extraction of the resource is less than the natural rate at which the resource renews itself.
Examples include: Solar energy, oxygen, biomass, fish stocks and forestry.
Explain free goods in terms of renewable resources
Free goods do not use up any factor inputs when supplied.
Free goods have a zero opportunity cost, which means that the cost of supplying an extra unit of that free good is zero.
