basic economic problem Flashcards
what is the basic economic problem
(6)
- the basic economic problem is scarcity.
- scarcity means that there are not enough resources to produce all the goods and services that consumers want
- scarcity occurs due to limited resources due to finite recourses and unlimited human wants due to human greed
- this problem is universal and permanent
- scarcity affects developing and developed countries, it is a universal problem.
- human wants are unlimited due to greed whereas resources are limited due to finite resources
- scarcity is a relative concept
what are scarce goods
(4)
- scarce goods have a price which is determined by relative scarcity
- something has to be sacrificed to obtain them meaning there is an opportunity cost
- scarce goods use up scrace recources
- examples include crude oil
4 factors of production
- land
- capital
- labour
- enterprise
define needs and wants
- wants are unlimited and include anything a consumer would like weather or not they have the resources to purchase it such as the latest electronic gadget.
- needs are limited only to what is needed to survive such as water
what are resources
- resources are classified as natural, human and man made also known as factors of production
what are human resources/labour recources
- this is human effort which is directed to the production of goods and services
- labour is the reason why economic activity takes place
- it is the services of labour which are bought and sold
what are man made/capital resources
- they are reserved for use in further production
- examples include machines, factories and delivery vans
- capital means any produced means of production
- capital may be categorised as industrial, social, private or financial
what is scarcity (3)
- scarcity is the fundamental economic problem of having limited resources and unlimited wants and needs
- Available resources are not sufficient to satisfy the demands of society
scarcity is a universal problem that exists in all economic systems - scarcity can be controlled but cant be eradicated
- it is a permanent problem
what is shortage
- it is a temporary problem
- it occurs when there is an imbalance between demand and supply of a particular good or service
- shortages arise when the demand exceeds the supply for a product. Resulting in an insufficient quantity of the product available for consumers
- shortages can occur due to external factors such as natural disasters, supply chain disruptions or change sin demand
- shortages can be resolved by changing raising the price to reduce demand
what is opportunity cost
the benefit lost from the next best alternative given up
how does an individual get faced with opportunity cost
they must choose what to buy with their limited income to satisfy their wants. for example making a choice on weather to buy a shirt or shoes.
- rational consumers spend their income on a way which gives them the greatest level of satisfaction in order to do this they have to but goods which give them the greater value for their money
how do producers face opportunity cost
- producers must choose what to produce with their limited resources for example should you produce an air fryer or a microwave
- also make choices on how to produce and for who to produce
- producers are motivated to maximise profits therefore willi produce goods which are in greater demand and willi attempt to produce them in the most cost efficient way
how do government face opportunity cost
- Governments must choose what services to spent their limited tax revenue. for example spend it on education or health.
- they make choices on how to produce and whom to produce for
- tax revenue is spent in a way they think willi maximise society welfare
what are natural resources
(3)
- also known as land
- describes all natural resources supplied by nature which can be used to generate money
- includes faming, mineral deposits, fishing, rivers and lakes
what is enterprise
(3)
- the person who undertakes production with a view to make money
- the entrepreneur organises other factories is not the most profitable productive unit
- they are risk bearer and profit is seen as a necessary reward for the risk taking
describe the problems with scarcity (6)
- the problem with scarcity is that there are limited resources but unlimited wants(1). for example oil is limited as there is only a finite supply (1)
- wants for goods and services are unlimited because people are inherently greedy(1)
- technological changes and advancements means people want newer versions (1)
- scarcity is a universal problem in all economies (1)
- scarcity cant be eradicated but can be managed (1)
- scarcity is a relative concept it only exists when we have increased wants (1)
how does scarcity effect ways firms make choices (2)
firms have limited sales revenue so cannot produce al the goods and services they want (1)
firms have to make choices on how to allocate resources in order to maximise their profits(1) such as choosing weather to produce a microwave or a fridge (1)
how does scarcity affect the choices made by governments (2)
- governments have limited tax revenue so cannot provide all the services they want to (1)
Governments have to make choices on how to spend revenue to maximise social welfare(1) such as choosing weather to spend on healthcare or education(1)
what is relative scarcity
Describes where resources are limited in supply compared to demand
explain methods of reducing the impact of scarcity (6)
- discovering new resources for example finding new oil reserves(1)
- specialisation is also a method of reducing scarcity in order to improve efficient use of scarce resources (1)
- resource of substitution is a further method to reduce scarcity as it helps reduce the pressure on the finite resource (1) for example using machinery instead of labour(1)
- alternative resources can be sought for example solar and wind energy instead of fossil fuels (1)
- geographical mobility of resources can be improved for example helping workers find employment across the country (1)
- occupational mobility can be improved for example training schemes which provide workers with flexible skills (1)
how are scarce resources allocated by price mechanism (3)
- if the demand for a good increases there willi be a shortage and the market price would rise
- the market price also acts as a signal to producers motivated by profit
- if the market price rises the good willi become more profitable to supply than other goods which willi encourage existing and new suppliers to increase their supplies
compare scarcity and shortage (3)
- scarcity involves unlimited wants and limited resources whereas shortage involves when demand exceeds supply
- scarcity can never be solved whereas shortage can be solved by an increase in price or supply
- scarcity is a universal problem and applies in all economies whereas shortage may only apply in certain markets
what are free goods
goods that have an unlimited supply which have no opportunity cost such as air
what are diminishing returns
its an economic principle stating that as investment in a particular area increases the rate of profit from that investment, after a certain point, cannot continue to increase if other variables remain at a constant
what are trade-offs
in economics a trade off is defined as an opportunity cost
what is GDP
it is the standard measure of the size of health of a countries economy. it is the way we measure and compare how well or how badly countries are doing. in other words, the value, profits and consumption of every item, product or service brought to the market by workers companies or other economic resources, resident inside a country in a period of time is part of the GDP
what are the 3 economic questions to ask when trying to make the cost use of limited resources
- what should be produced? - should resources make consumer goods, machinery, defence, weapons or hospitals
- how should it be produced? - should firms use the latest technology or skilled craftsmen. use incentives to motivate labour managers and entrepreneurs
- whom should it be produced for? should goods or services be allocated to those with most money or those with special needs
what is a marginal utility
utility refers to the benefit consumers derive from a good. can be measured based on individuals choices between alternatives or preferences revealed in their willingness to pay. change in total utility or satisfaction derived from consuming an extra unit of a product
distinguish using examples between economic goods and free goods (4)
- Economic goods needs the use of scarce resources to produce whereas free goods are abundantly supplied
- economic goods creation have an opportunity cost whereas free goods creation does not deplete scarce resources
- economic goods carry a price whereas free goods do not command a price
- an example of an economic good is a car whereas an example of free goods is air
what is an externality
externality is a cost or benefit which a producer or consumer imposes on the rest of society. there is a spill over effect arising from production or consumption. Positive externalities benefit the wider community. for example art galleries, healthcare and education
what is a market failure
market failure is when the production or consumption of a good in the free market is not at the socially optimal level. too much/little production or consumption of a good/service
what is a command economy
when a nations government own and control the means of production
what is a market economy
economic system where production and prices are determined by unrestricted competition between privately owned businesses
what is a mixed economy
economic system combining private and state enterprise
what is a demerit good (3)
- something that is bad for you and over provided by the market mechanism.
- consumption can lead to a negative externalities
- the social cost of consumption is higher than the amount cost such as drugs, gambling or high in sugar soft drinks
define private goods
consumption by one person results in the good not being available for consumption by another
define public goods
consumption by one person does not reduce the amount available for consumption by another person called non rivalry.
once provided no person can be excluded from benefitting
examples include: prison service, street lighting, education and health
what is a free rider
a free rider is someone who receives the benefit but allows other to pay for it (such as avoiding tax)
what is a merit good
one which is under provided by the market mechanism. one which people think should be provided in greater quantities such as healthcare, education and refuse
disadvantages of the free market economy
free markets can fail to achieve an economically and socially efficient and equitable allocation of resources. for example free market activity can lead to a rise in the scale of income and wealth inequality. it can also lead to under or no provision of merit goods such as health and education - which many cant afford - leading to lower social welfare. free market may fail to address negative externalities from production and consumption leading to unsustained growth
when do negative externalities occur
when production and consumption impose external costs on 3rd parties outside of the market for which no appropriate compensation is paid. this causes social costs
