1.1.3 The economic problem Flashcards
What is Scarcity?
Exists because resources are finite whereas wants are infinite
Scarcity questions
- What to produce and how much to produce?
- How should the goods and services be produced?
- How should the goods produced be allocated?
Define Factors of Production (CELL)
Resources that include;
- Land
- Labour
- Capital
- Enterprise
The production is input, but what produce is output
Factors of Production - Land
Includes all Natural Resources, Raw Material, the Fertility of the Soil and resources found in the Sea
Reward/Incentive
- Rent
Factors of Production - Labour
Refers to those involved in the production of goods and services and includes all human effort both Physical and Mental
Reward/Incentive
- Wages
Factors of Production - Capital
Any man-made aid to production including Factory Buildings, Offices, Machinery, IT equipment which are used to make other goods and services
Reward/Incentive
- Interest from the investment
Factors of Production - Enterprise
The entrepreneur performs 2 essential functions:
- Bringing together the other factors of production so that goods and services can be produced
- Taking the risks involved in production
Reward/Incentive
- Profit- an incentive to take risks
What are Renewable Resources?
Those whose stock levels can be maintained at a certain level
Examples
- Solar Energy
- Wind Power
- Wood
- Fish
If the resources are consumed faster than they are renewed, the stock of the resources will decline over time.
What are Non-Renewable Resources?
Those which will eventually be completely depleted
Examples
- Oil
- Platinum
- Copper
The stock level decreases over time as it is consumed. Methods such as recycling and finding substitutes, such as wind farms, can reduce the rate of decline of the resource.
Define Opportunity Cost
The next best alternative that is forgone when a choice is made
What are Economic Goods?
Are created from resources that are limited in supply and so are scarce. Consequently, they command a price
What are Free Goods
Are unlimited in supply (such as sunlight or sand in the beach). Consumption by 1 person does not limit consumption by others. Therefore, the Opportunity Cost of consuming a Free Good is zero
TEST YOURSELF - why do societies have to make choices about what to produce?
Because resources are scarce but wants are infinite, so choices must be made
TEST YOURSELF - if a person’s top 2 priorities are a holiday in Greece and a new home cinema system but only has enough money for one of these, what would be the Opportunity Cost of purchasing the home cinema system?
The holiday in Greece - this is the real cost of making a choice
TEST YOURSELF - why does the consumption of free goods not incur an Opportunity Cost?
No resources are sacrificed in their use, so the opportunity cost is zero
