Basic Economic Principles Flashcards
What is the basic economic problem?
Relative scarcity is the basic economic problem or starting point in economics. It arises because the volume and/or efficiency of resources available for production is finite or limited, relative to the level of people’s needs and wants (which are unlimited. It is because of relative scarcity, individuals and nations cannot have all the material things they desire. They are forced to make choices or decisions as to what [needs and wants] to satisfy first.
What is the first economic question and how does it answer the main basic economic problem (demand side)?
How should goods and services be produced?
Using the economy’s scarce resources to produce one thing requires giving up another (like on PPC) eg. deciding to preserve a wilderness area has the opportunity cost of giving up the usage of the land. Every society must decide what it will produce with it’s scarce resource.
What is consumer sovereignty?
Consumer sovereignty refers to controlling power of consumer, versus the holders of scarce resources, in what final products should be produced from these scarce resources.
What is allocative efficiency?
Allocative efficiency occurs when all goods and services within an economy are distributed according to consumer preferences to satisfy their needs and wants.
What is the second economic question?
How should goods and services be produced (supply side)?
These are all sorts of choices to be made in determining how goods and services should be produced. eg. should a firm employ a few skilled workers or several unskilled workers.
What is productive efficiency?
Productive efficiency occurs when the optimal combination of inputs results in the maximum amount of output at a minimal cost. A productively efficient economy always produces on its PPC ie. it is impossible for the economy to produce more of one good or service without reducing production of another one.
It requires for all firms to use the least costly FOPs, and the best processes and technology available, as well as wastage during production being reduced to a minimum.
What is the third economic question?
For whom should goods and services be produced?
If a good or service is produced, a decision must be made about who will get it. A decision to have one person or group receive a good or service usually means it will not be available to someone else.
What the economic goals?
GEEFS (Growth, Efficiency, Equity, Freedom, Security)
- Economic Efficiency
- Economic Freedom
- Economic Security
- Economic Equity
- Economic Growth and innovation
What is the economic goal of economic efficiency?
Making the most of resources without any waste is an economic goal.
What is the economic goal of economic freedom?
Being able to make choices about which goods and services to produce and distribute without government interference or intervention is an economic goal. This freedom allows entrepreneurs to take risks and make choices to start various businesses.
What is the economic goal of economic security?
Knowing that goods and services will be available when needed. Having a safety net that protects individuals in a time of economic disaster.
What is the economic goal of economic equity?
A fair distribution of wealth (taxation - the more you earn the more you pay).
Economic Growth and Innovation
Using new ideas and ways of creating goods and services leads to growth and a higher living standard of living or way of life for all.