1.1.3 The economic problem

Question 1

Barter

Answer 1

The practice of exchanging one good or service for another without using money.

Question 2

Basic economic problem

Answer 2

There are infinite wants but finite factor resources with which to satisfy them.

Question 3

Capital goods

Answer 3

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.

Question 4

Constraints

Answer 4

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.

Question 5

Economic agent

Answer 5

A participant in an economic system - be it a consumer, business or the government.

Question 6

Entrepreneur

Answer 6

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.

Question 7

Factor incomes

Answer 7

Factor incomes are the rewards to factors of production. Labour receives wages and salaries, land earns rent, capital earns interest and enterprise earns profit.

Question 8

Factors of production

Answer 8

Factors of production are the inputs available to supply goods and services:
Land - Natural resources available for production
Labour - The human input into the production process
Capital - goods used in the supply of other products e.g. technology, factories and specialized machinery
Enterprise - Entrepreneurs organise factors of production and take risks

Question 9

Finite resources

Answer 9

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.

Question 10

Free goods

Answer 10

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 is zero.

Question 11

Inputs

Answer 11

Labour, capital and other resources used in the production of goods and services.

Question 12

Interest

Answer 12

Interest is the reward to the ownership of capital.

Question 13

Land

Answer 13

Natural resources available for production.

Question 14

Labour

Answer 14

Physical and mental effort by humans.

Question 15

Manufacturing

Answer 15

The use of machines, tools and labour to make things for use or sale. The is most commonly applied to industrial production, in which raw materials are transformed into finished goods on a large scale.

Question 16

Needs

Answer 16

Humans have many different types of wants and needs - economic, social and psychological. A need is essential for survival; food satisfies hungry people. A want is something desirable but not essential to survival e.g. cola quenches thirst.

Question 17

Non-renewable resources

Answer 17

Non-renewable resources are resources which are finite and cannot be replaced.Minerals, fossil fuels and so on are all non-renewable resources.

Question 18

Opportunity cost

Answer 18

value of the next best alternative foregone when a choice is made

Question 19

Rationing

Answer 19

Rationing is a way of allocating scarce goods and services when market demand exceeds available supply. There are many ways of rationing including by price, by consumer income, by assessment of need, by education level and by age, gender, nationality.

Question 20

Renewable resources

Answer 20

Renewable resources (in theory) are replaceable if the rate of extraction of the resource is less than the natural rate at which the resource renews. Examples of renewable resources are solar energy, oxygen, biomass, fish stocks and forestry.

Question 21

Rent

Answer 21

Rent is income typically associated with the ownership of land, but which can also include rental income from leasing out other assets such as cars, capital equipment.

Question 22

Scarcity

Answer 22

Scarce means limited. There is only a limited amount of resources available to produce the unlimited amount of goods and services we desire.

Question 23

What is the influence of scarcity on prices in a free market?

Answer 23

The scarcer a resource, the higher the price
The less scarce a resource, the lower the price

Question 24

Why is the distinction between renewable and non-renewable resources important?

Answer 24

Sustainability: Understanding the difference is vital for sustainable resource management.
Economic Implications: Depletion of non-renewable resources can lead to rising prices and economic challenges.

Question 25

How are opportunity costs important to economic agents?

Answer 25

Consumers: Consumers make choices about spending money and time. Opportunity cost helps them make informed decisions, such as choosing between buying a new phone or saving for a vacation.

Producers: Producers allocate resources to maximise profits. Opportunity cost influences production decisions, like choosing which products to manufacture.

Governments: Governments allocate budgets to various programmes and policies. Opportunity cost informs decisions on allocating resources between healthcare, education, defence, and more.

Question 26

What are the three fundamental economic questions?

Answer 26

What to produce?
For whom to produce?
How to produce it?