1st assessment

Question 1

what is the basic economic problem (4)

Answer 1

• The basic economic problem is scarcity. Scarcity is the issue where human wants are unlimited due to greediness, but the resources to provide for these wants are limited due to finite supplies.
• Scarcity can be controlled but cannot be eradicated.
• Scarcity is a relative concept.
• scarcity is a universal problem affecting all economies

Question 2

scarcity v shortage (3)

Answer 2

• Scarcity cannot be resolved whereas shortage can be resolved by raising the price to reduce demand
• scarcity is a universal problem and applies in all economies whereas shortage may only apply certain markets
• Shortage is when demand for a product is greater than its supply whereas scarcity is when wants for a product are greater than its supply

Question 2

define opportunity cost

Answer 2

Opportunity costs is the benefit lost from the next best alternative given up. An example is when a student has a certain amount of income and must choose if to buy a textbook or a calculator. If the student uses the textbook, then the opportunity costs is the calculator as its lost

Question 3

basic economic problem impact on individuals, firms and the government

Answer 3

• Individuals – they have limited income which leads them to have to make choices that will lead to the greatest satisfaction as they aim to maximise utility
• Firms - because they have limited recourses and make the choices that will lead to the maximise profit for the firm. firms also have limited sales revenue so they cannot produce all the goods and services they want. firms also have to make choices about how to allocate recourses to maximise profits such as holding up inventory in a large warehouse.
• Governments – because they have limited tax revenue so they cannot produce all the goods and services they want to. firms also have to make choices about how to spend revenue to maximise social welfare such as education or healthcare spending. and make the choice that will lead to the greatest social benefit to maximise welfare.

Question 4

what is market failure

Answer 4

Market failure occurs when the market fails to lead to the optimal allocation of recourses

Question 5

different types of market failure (6)

Answer 5

• One type of market failure is the under provision of public goods (for example street lighting) because firms are not able to charge and make profit from providing them. Another problem is that nonpayers or free riders cannot be excluded from using those goods as public goods are non-excludable and non-rivalry
• Another type of market failure is when one firm dominates a market (monopoly), this means there is reduced customer choice, high prices once the competition has been eliminated and poorer quality goods/services due to lack of competition. It also means that firms can take advantage of consumers in the market
• Another type of market failure is the over production or consumption of goods and services with negative externalities (pollution, environmental and damage) which are costs which private firms do not account for in production. This means that the cost of spill over effects of production is imposed on a 3rd party
• Positive externalities benefit society and may be underprovided by the market such as unprofitable bus routes. These are products which benefit society but may be underprovided by the market. This means that market failure occurs because these products won’t be provided unless firms receive subsidies
• Another type of market failure is wealth and income inequality where there is an inefficient allocation of recourses which means that wealthier people have access to more recourses than other people
• The final type of market failure is lack of information where there is unequal knowledge between the producers and consumers of a product. An example is the lack of awareness of salt levels in food

Question 6

government intervention in public and merit goods

Question 6

the law diminishing marginal returns