Chapter 1: Basic Economic Problem Flashcards
Define a resource [1]
Resources are the inputs required to produce a good or a service
Define the basic economic problem [1]
There are finite resources and infinite wants
What does the basic economic problem lead to? [1]
Scarcity
Compare an economic and free good with an example [4]
- A free good is one that doesn’t require scarce resources for its production and are abundant in supply. Free goods don’t have an opportunity cost.
For example: sunlight - An economic good is one that requires scarce goods for its production and is hence limited in supply. Economic goods have an opportunity cost.
For example: paper
Describe the flowchart of the basic economic problem [3]
Basic economic problem –> scarcity –> choice –> opportunity cost (only when the other choice holds value is there an opportunity cost/loss)
Define opportunity cost [1]
Opportunity cost is the value of the next best alterative forgone
Which choice do all economies chose? [1]
All individuals, firms and macroeconomies choose the choice with the least opportunity cost
What are the factors of production [4]
- Land (any natural resource)
- Labor (a workforce)
- Capital (any man-made resource)
- Enterprise
What is meant by land as a factor of production? [1]
Any natural resource is called land. For example: crude oil, trees, ores
What is meant by labor as a factor of production? [1]
The physical and mental effort which goes into the production of a good or service
What is meant by capital as a factor of production? [1]
Any man-made resource is known as capital
What is meant by enterprise as a factor of production? [1]
The factor of production which takes the risk of employing other factors of production to produce a good or service
What is the reward for each factor of production? [4]
Land: rent
Labor: wages
Capital: interest
Enterprise: profit
What is meant by a producer? [1]
The people and organizations that make and sell goods and services are known as producers
What is meant by consumption? [1]
The using up of goods and services to satisfy human needs and wants.
Define consumer expenditure [1]
The total amount a consumer spends each period on economic goods
Compare consumer and capital goods with examples [6]
- Consumer goods are economic goods that satisfies an immediate consumers need or want. There are two types: durable and non-durable. Durable goods can be used repeatedly over many months or years to satisfy a want before they eventually wear out. For example: cars, computers, televisions. Non durable goods are perishable or used up quickly. For example: food, drink, petrol.
- Capital goods are human made resources used in the production of other goods and services. The purchase of capital goods is known as an investment. Investments in capital goods like factories and machines increase the capacity of organization to produce goods and services. For example: drills, tractors, power stations and factory buildings.
Define factor mobility [1]
Factor mobility is the ease with which resources or factors of production can be moved from one productive activity to another without incurring significant costs or loss of output.
Define the two types of mobility of factors of production [2+2]
- Geographical: refers to the willingness and ability of a person to relocate from one area to another due to employment purposes (in context of labor)
- Occupational: easy with which a person can change between jobs (in context of labor)
Factors which affect geographical and occupational mobility [4]
- Geographical: family ties, related communities, cost of living
- Occupational: cost, training period, educational profession (if their skill base is transferable between different occupations, their occupational mobility is high)
Why does unemployment happen?
What is structural unemployment? [2]
- When the skills of an individual are outdated or unrequired by an economy
- When many workers are not able to easily transfer between occupations in an economy
What are factor rewards? [1]
The payment different factors of production require and receive in order to participate in productive activity
Why do some consumers, workers, producers and governments have more choices available to them than others? [2]
- Scarce resources are unevenly distributed between and within countries
- Some countries have more resources than others / relative lack of resources in poorer countries
What is the impact of good factor mobility on the total production? [2]
- Increases production - better efficiency
- Factors can be used for more / other productive tasks
Why is factor mobility important? [3]
- In case of change in consumers demand
- To produce different goods
- Producers can switch between different productive tasks
What is the PPC (production possibility curve)? [2]
It is the graphical representation of all the possible combinations of two goods that can be produced by the optimum utilization of available resources.
Why is the PPC concave? [1]
Due to the law of increasing opportunity cost
Describe the occupational and geographical mobility of each factor of production [8]
Land: geographically is immobile, but can be party occupationally mobile (least mobile factor of production)
Labor: mostly geographically and occupationally immobile (varies)
Capital: mostly geographically and occupationally immobile (varies)
Enterprise: most mobile factor of production (both geographically and occupationally as the same business is likely to do well in a different country, and the skill sets required can be used in many industries)
Where would points x,y,z be located on a PPC assuming they were inefficient, efficient and unattainable? [3]
X - inside the curve
Y - on the curve
Z - Outside the curve
What are the 4 key assumptions while drawing a PPC? [4]
- Only 2 goods/services can be produced
- Full employment of resources
- Fixed resources
- Fixed technology
What causes an outward shift in the PPC? [2]
- Increase in quantity of resources (more resources so more output potential increases)
- Increase in quality of resources (better allocation of resources due to better quality so output potential increases)
How would mass unemployment affect a PPC? [1]
It wouldn’t move the curve as the quantity of resources available remains the same, it will just move inside the curve signifying inefficient use of resources.
What would cause an inward shift in the PPC? [1]
- Depletion/reduction in quantity of resources
How does the PPC represent scarcity and opportunity cost? [3]
- The PPC itself represents scarcity as the curve shows the maximum possible/potential a firm/economy can output given a FIXED set of resources
- Point X (labeled outside the PPC) is unattainable due to the lack of resources which also represents scarcity
- Movement along the PPC shows opportunity cost, as an economy/firm is choosing to allocate more resources to a good, forgoing the opportunity to produce more of the other good
(It is a PPC question: other 3 marks will be gotten from diagram)
What causes changes in the quantity/quality of factors of production? (affects the PPC) [6]
- Cost (labor costs, raw materials)
- Government policies (taxes, subsidies)
- New technology
- Migration of labor
- Improved education and healthcare
- Weather conditions (for agricultural products)
What causes a shift along a PPC?
Reallocation of resources from one productive use to another
How can factor quantity of land, labor, capital and enterprise be increased? [2+2+2+2]
- Land: increase in rent may persuade more landowners to release their land into productive uses, new discoveries of natural resources, making use of previously unused natural resources, planting more trees/plants, recycling/reusing
- Labor: increase in wages may persuade more people to supply their labor to firms, an increase in the working population, improvements in healthcare
- Capital: a decision by producers to produce more capital goods, an increase in interest payments
- Enterprise: increase in the prices consumers are willing to pay for products may increase profits and encourage more people to start firms, fall in the number of paid jobs and rise in unemployment
How can factor quality of land, labor, capital and enterprise be increased? [4]
- Land: fertilizers and better land management, new technology, reducing use of chemicals in farming which can cause pollution, using organic and humane animal farming methods
- Labor: training and education can improve workforce skills
- Capital: advances in technology
- Enterprise: More higher quality training courses and better business advice/support for aspiring entrepreneurs
