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economics exam > basic economic problem > Flashcards

basic economic problem Flashcards

1
Q

what is scarcity (5)

A
  • scarcity is the basic economic problem
  • scarcity occurs because human wants for goods and services are unlimited but the resources required to produce them are limited
  • scarcity means that there are not enough resources to produce all the goods and services which consumers want
  • scarce goods have a price determined by relative scarcity
  • scarcity can be controlled but not eradicated
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2
Q

what are the 4 resources

A
  • land: natural resources supplied by nature used for production
  • labour: human effort directed to production of goods and services
  • capital: man made resources that are used for further production e.g. tractor
  • enterprise: the person who undertakes production to make profit
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3
Q

difference needs and wants (2)

A

needs are the goods and services necessary for survival which includes food water and shelter

wants are goods and services that may bring pleasure but aren’t needed for survival e.g. make-up

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4
Q

what is choice and opportunity cost

A

the opportunity cost of a decision is the forgone value of the next best alternative that is not chosen

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5
Q

effects of opportunity cost on individuals firms and government

A
  • limited income means they must make choices that lead to greatest satisfaction as they aim to maximise utility
  • firms have limited tax revenue and make the choices that will lead to maximum profit
  • governments have limited tax revenue and make the choice that will lead to the greatest social benefit to maximise welfare
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6
Q

scarcity and shortage difference (3)

A

shortage is when demand for a product is greater than its supply whereas scarcity is when wants for a product are greater than its supply

a shortage can be resolved by raising the price to reduce demand whereas scarcity cannot be solved

scarcity is a relative concept as there will never be sufficient resources to satisfy them

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7
Q

economic goods and free goods (4)

A
  • free goods do not demand a price where as economic goods demand a price
  • free goods are not scarce e.g. air whereas economic goods are scarce
  • free goods use up no scarce recourse in production whereas economic goods do use them up
  • free goods do not carry an opportunity cost whereas economic goods do have one
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8
Q

what are the three question asked regarding scarcity

A
  • what goods and services should the economy produce
  • how should goods and services be produced
  • who should receive the goods and services produced
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9
Q

what are the answer to the 3 questions related to scarcity in a controlled economy

A
  • governments decides what the population needs
  • governments set quotas for each factory and allocates the resources
  • prices and income are controlled by the government to reduce inequality
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10
Q

what is a command/planned economy? (3)

A
  • the government are in complete controlled of how resources are allocated and they own all resources
  • there is only a public sector no private sector exists
  • this system redistributes income and wealth equally so people are the same believing is resources are owned by private sectors it would lead to inequality
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11
Q

advantages and disadvantages of a planed economy (2+3)

A
  • basic necessities are made available to everyone are a price they can afford
  • fairer distribution of income and wealth
  • inefficient allocation of resources as gov fails to plan accurately for all society’s wants
  • limited consumer choice
  • inefficient production due to lack of profit motivation
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12
Q

what is a free market economy (4)

A
  • consumers and business deal with scarcity
  • only private sector no public sector
  • competition and profit motivation exists
  • resources are allocated by a price mechanism
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13
Q

steps of price mechanism (4)

A
  • demand comes from consumers and an increase in demand willi cause a shortage leading to increased prices
  • if prices rise the good becomes more profitable so more business willi try to produce it
  • more resources are required to make the product in order to supply more
  • resources are then allocated to the production to more profitable products
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14
Q

answering the questions in a free market economy

A
  • consumers decide what should be produced by their demand
  • producer decides how to produce and will use most efficient method to keep costs down and increase profit
  • consumers with enough income to afford prices charged
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15
Q

what is a mixed economy? (2)

A
  • private sector and public sector work together to meet the needs and wants
  • all countries have a mixed economy at different levels
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16
Q

Advantages and disadvantages of free markets (4+2)

A
  • efficient recourse allocation as consumers demand
  • less shortages and surpluses due to price mechanism
  • freedom of choice for consumers
  • technical efficiency in production to keep costs low
  • market failure
  • high income inequality
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17
Q

why does a government intervene (3)

A
  • to correct situations where free market failed to allocate resources
  • to regulate and control the private sector e.g. health and safety
  • control overall economic performances e.g. inflation and unemployment’s
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18
Q

what is market failure

A

when the market fails effectively allocate their resources

19
Q

examples of market failure/issues with free market/issues with price mechanism/reasons for gov intervention (6)

A
  • failure to produce public goods: public goods are non-excludable and non-diminishing. public goods would not exist in a free market as no profit can be made
  • failure to produce sufficient merit goods: merit goods have positive externalities but demand a price e.g. private school is only for the rich
  • over production of demerit goods: causes negative externalities which harms communities e.g. second hand smoking
  • development of monopolies and oligopolies: removes competition so prices increase and quality decreases
  • income and wealth inequalities: gap between rich and poor would be massive in a free economy
  • bad production methods: lead to negative externalities e.g. pollution
20
Q

Methods government use to intervene (9)

A
  • redistribute wealth and reduce income inequality
  • reduce negative externalities
  • reduce demerit good consumption by using indirect taxation
    sets a maximum and minimum price
  • laws against tobacco
  • imposes fines on firms breaching pollution permits
  • provides public goods through taxation
  • encourages the production of merit goods through taxation
  • transfer payments e.g. benefits and to ensure minimum living standard
  • regulations against monopolies
21
Q

what are private goods

A

private goods are goods which business can restrict to those who pay for them. once the good is bought the consumer is te only one who receives a benefit making them excludable

22
Q

draw a production possibility diagram

A
23
Q

explain how a PPC shows economic efficiency (4)

A
  • producing goods and services at points inside the boundary is inefficient as some resources aren’t utilised whereas points on the boundary represent economic efficiency and points outside the boundary are impossible
  • economic efficiency occurs when all resources are allocated with minimum waste
  • no opportunity cost occurs when moving a point within the boundary onto the boundary as it indicates are more efficient use of resources
  • economic efficiency means producing maximum output from minimum input
24
Q

what do PPD show

A
  • opportunity cost
  • economic efficiency (occurs on any point on the curve)
  • economic growth
    a PPD shows the combination of goods and services that can be produced in a country with a given amount of resources
25
Q

what is Pareto efficient

A

it is not possible to make one person better off without making someone else worse off

26
Q

Definition of efficiency

A

efficiency is concerned with how well resources are used to produce an end result

27
Q

what is technical efficiency

A

when the least amount of recourse are used to make each product e.g. producing with the lowest opportunity cost

28
Q

allocative/economic efficiency (3)

A

when resources are being used to make the products that are most wanted in the country
when all resources are allocated in the best way with minimum waste
economic efficiency is when allocative and technical efficiency are achieved

29
Q

what is productive efficiency

A

Exists when production is achieved at lowest cost which can only occur if there is technical efficiency

30
Q

what is equity

A

it concerns social justice and fairness
it related to how fairly income and opportunity cost are distributed between different groups in society

31
Q

Causes of changes to economic growth (6)

A
  • discovery of new raw materials
  • invention of new production processes
  • advances in technology
  • increased labour / capital
  • war
  • natural disasters
32
Q

draw opportunity cost diagram and economic efficiency diagram

A
33
Q

what is factor substitution

A
  • if the price of labour increases when the price of capital stays the smae a firm will react by using less labour and more capital e.g. a substitution
34
Q

what is ocupational and geograpghical mobility (2)

A

occupational mobility concerns the movement of a factor of production from one occupation to another
Geographical mobility is the movement from one location to another

35
Q

substitution and mobility of the factors of production

A

land - not geographical mobile but high degree of occupational mobility
labour - people may become geographical and occupationally mobile
capital - both mobility although some types of capital are extremely immobile

36
Q

how does substitution and mobility of resources contribute to improved efficiency

A

increased advances in technology replaces labour. Workers also have to be more flexible and increase their skills

37
Q

measure to improve mobility

A

government can seek to improve labour market efficiency by removing the imperfections which occur in the labour market e.g. provide labour market information

38
Q

what is substitution affect in terms of consumers

A

as price of goods increase people are likely to switch and purchase from other businesses e.g. cocacola and pepsi

39
Q

what is income affects (2)

A

if prices increase consumer will be able to buy a smaller number of goods with disposible income

this means that their real income falls and a consumer will react by buying less of a good

40
Q

why does a demand curve slope downward

A

income effect
Substitution effect
law of diminishing marginal utility

41
Q

law of diminishing marginal utility (5)

A
  • utility means satisfaction a consumer gains utility when they purchase a good or service
  • marginal utility is the utility gained from consuming and extra unit of a good
  • whilst total utility increases the law of diminishing marginal unit will decline as consumption of the good increases
  • this implies that the more of a product is consumed the less satisfaction is gained
  • therefore consumers will only be tempted to buy more of a product if the price was lowered
42
Q

what is occupational mobility

A

workers ability to move between jobs because of high skills

43
Q

what is geographical mobility

A

measure of how populations and goods move over time.

economics exam (14 decks)

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