3- The Economic Problem Flashcards
What is the Economic Problem?
Scarcity (limited/scarce resources)-
People have unlimited wants however they aren’t enough resources available to supply all these wants.
What does the Economic Problem cause to be made?
Choices on how resources are allocated.
What choices have to be made?
- 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)
What is the purpose of economic activity?
To satisfy the wants and needs of society.
Opportunity Cost Definition
The value/benefit lost of the next best alternative, when making a choice.
How do you know if a good choice has been made?
The value/ benefit of your current choice is greater than the opportunity cost.
How do you know if a bad choice has been made?
The value/benefit of your current choice is less than your opportunity cost.
Needs definiton
The minimum that is necessary for a person to survive as a human being. E.g. water, shelter, food.
Wants definiton
Desires for the consumption of goods and services.
Renewable Resources definition
Resources, such as food stocks or forests, , that can be exploited over and over again because they have the potential to renew themselves.
Examples of renewable resources
Wood, Wind, Solar Energy, AIr
Non renewable resources definiton
Resources, such as coal and oil, which once exploited cannot be replaced.
Examples of non renewable resources
Oil, Coal, Natural Gases
Sustainable resource definiton
Renewable resources that is being economically exploited in such a way that it will not diminish or run out.
Non sustainable resource definiton
A resource that is being economically exploited in such a way that it’s stock is being diminished over time.
Working or Circulating Capital definition
Resources that are in the production system waiting to be transformed into goods or other materials before being finally sold to the consumer.
Issues with Opportunity Cost
- 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.
How is opportunity cost used?
- 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.
What is an economy?
A system which attempts to solve the basic economic problem.
Free goods definitions
Goods that are unlimited in supply which therefore have no opportunity cost.
Human capital definition
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.
Adam Smith Invisible Hand Theory
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.
