3- The Economic Problem

Question 1

What is the Economic Problem?

Answer 1

Scarcity (limited/scarce resources)-

People have unlimited wants however they aren’t enough resources available to supply all these wants.

Question 2

What does the Economic Problem cause to be made?

Answer 2

Choices on how resources are allocated.

Question 3

What choices have to be made?

Answer 3

• What to produce- firms decide based on consumer demand (economic incentives)
• How to produce it- firms allocate resources to be cost effective
• Who to produce for- those who can afford it (supply and demand)

Question 4

What is the purpose of economic activity?

Answer 4

To satisfy the wants and needs of society.

Question 5

Opportunity Cost Definition

Answer 5

The value/benefit lost of the next best alternative, when making a choice.

Question 6

How do you know if a good choice has been made?

Answer 6

The value/ benefit of your current choice is greater than the opportunity cost.

Question 7

How do you know if a bad choice has been made?

Answer 7

The value/benefit of your current choice is less than your opportunity cost.

Question 8

Needs definiton

Answer 8

The minimum that is necessary for a person to survive as a human being. E.g. water, shelter, food.

Question 9

Wants definiton

Answer 9

Desires for the consumption of goods and services.

Question 10

Renewable Resources definition

Answer 10

Resources, such as food stocks or forests, , that can be exploited over and over again because they have the potential to renew themselves.

Question 11

Examples of renewable resources

Answer 11

Wood, Wind, Solar Energy, AIr

Question 12

Non renewable resources definiton

Answer 12

Resources, such as coal and oil, which once exploited cannot be replaced.

Question 13

Examples of non renewable resources

Answer 13

Oil, Coal, Natural Gases

Question 14

Sustainable resource definiton

Answer 14

Renewable resources that is being economically exploited in such a way that it will not diminish or run out.

Question 15

Non sustainable resource definiton

Answer 15

A resource that is being economically exploited in such a way that it’s stock is being diminished over time.

Question 16

Working or Circulating Capital definition

Answer 16

Resources that are in the production system waiting to be transformed into goods or other materials before being finally sold to the consumer.

Question 17

Issues with Opportunity Cost

Answer 17

• Not all factors have alternatives
• Some alternatives are unknown
• Agents make lack information on alternatives
• It is difficult to switch some factors for another use.

Question 18

How is opportunity cost used?

Answer 18

• For consumer to decide how to spend money
• Firms to decide how to maximise use of resources
• It also goes beyond monetary cost and can be in the form of time.

Question 19

What is an economy?

Answer 19

A system which attempts to solve the basic economic problem.

Question 20

Free goods definitions

Answer 20

Goods that are unlimited in supply which therefore have no opportunity cost.

Question 21

Human capital definition

Answer 21

The value of the productive potential of an individual or group of workers; it’s made up of their skills, dedication, training of an individual group and represents value of future earnings and production.

Question 22

Adam Smith Invisible Hand Theory

Answer 22

This theorises that the government should stay out of the economy to allow private firms to maximise profit as an ‘invisible hand’ reallocates resources to satisfy consumer demand. So producer (who want to maximise profit) will have market incentives to produce the right good for society to maximise consumer’s utility.

He also believes firms should specialise and divide the labour force so there is more output. He believes it will lead to more competitive salaries.Smith gave the famous example of pins. He asserted that ten workers could produce 48,000 pins per day if each of eighteen specialized tasks was assigned to particular workers. Average productivity: 4,800 pins per worker per day.