Basic Economic Ideas Flashcards
What is the basic economic problem?
The basic economic problem refers to the problem that this world has infinite wants and scarce or finite amount of resources (land, labour, capital, enterprise).
Resources may be less in some countries like Africa, where there is less fertile soil. While in Ethiopia there are resources but the employment of those resources is very low eg. only 4% of its fertile soil is being used.
What is the difference between needs and wants?
Needs are basic resources necessary for humans to survive without these needs humans would die eg. food, water , warmth , shelter.
Wants are desires of humans which are not necessary for their survival such as a new car, holiday trips, mansions. Humans have infinite WANTS and these wants cannot be fulfilled by the finite amount of resources we have available.
What are the 3 economic question?
These questions are asked to overcome the basic economic problem
What to produce?
Since there are finite resources, we cant produce everything and according to the needs and wants certain things have to be produced.
How to produce?
Goods can be produced in a number of different ways. The 4 factors of production can be used differently to produce the same goods. So the most efficient way to produce should be seen.
For whom to produce?
Products have to be produced for certain groups of people and certain products have to be produced because not every product can be made due to finite resources, by making product for a certain group buying power and demand are some of the factors to consider.
What is opportunity cost?
Opportunity cost is the next best alternative sacrificed in order to choose a certain decision. It is the loss of the next best alternative.
What are the 4 factors of production?
Factors of production are those resources needed to produce goods or services. There are four factors
of production and they are in limited supply.
Land: This term is used to cover all of the natural resources provided by nature and includes fields and
forests, oil, gas, metals and other resources.
Labour: This is the efforts (both mental and physical) of people needed to make products.
Capital: This includes all man-made resources used to produce goods and services e.g. machinery,
buildings, equipment, finance, etc.
Enterprise: this is the skill and risk-taking ability of the person who brings the other resources together
to produce a good or service e.g. the owner of a business. These people are called entrepreneurs.
What is a market economy?
A market economy is an economy in which their is private ownership of the firms. The goal is to maximize profits
What is a command economy?
A command economy is an economy in which there is government ownership of firms. The goal is to maximize social welfare.
What is a mixed economy?
An economy in which there is government and private ownership of firms.
Private owned: maximize profits.
Government owned: social welfare
Which country has market economy and which country has command economy?
United States: Market
North Korea: Command
What is marginal benefit?
The benefit that arises from an increase in an activity is called marginal benefit.
For example, your
marginal benefit from one more night of study before a test is the boost it gives to your grade. Your
marginal benefit doesn’t include the grade you’re already achieving without that extra night of work.
What is marginal cost?
The opportunity cost of the increase in activity. in other terms the leisure activity u may have achieved if u hadnt studied.
How to decide on the margin?
To make
your decisions, you compare marginal benefit and marginal cost. If the marginal benefit from an extra
night of study exceeds its marginal cost, you study the extra night. If the marginal cost exceeds the
marginal benefit, you don’t study the extra night.
