Chapter 1 - The basic economic problem Flashcards
What is the basic economic problem?
The basic economic problem is that there are finite resources available in relation to the infinite wants and needs that humans have.
What are economic goods?
Economic goods are scarce in the relation to the demand for them. E.g. oil and corn
What are free goods?
Free goods are abundant in supply. E.g. sunlight and the air we breathe
What are the four factors of production?
Factors of production are the resources that are used to produce goods and services. The four factors of production are land, labour, capital and enterprise.
What does the production of all goods and services require?
The production of any good or service requires the use of a combination of all four factors of production.
What is the factor of production land?
Land is any non-man-made natural resources that are available for production. Some countries have a vast amount of a particular natural resource and so are able to specialise in its production. Some examples of land are iron ore, sand and cows. A reward for land is rent.
What is the factor of production labour?
Labour is the human input into the production process. Labour involves mental or physical effort. Not all labour is of the quality as it can be skilled or unskilled. Some workers are more produced that others because of the education, training and experience they have. Some examples of labour are production directions or supply chain staff. A reward for labour is wages.
What is the factor of production capital?
Capital is any man-made resource that is used to produce goods and services. Some examples of capital are tools, machines and computers. A reward for capital is interest.
What is the factor of production enterprise?
Enterprise involves taking risks in setting up or running a firm. An entrepreneur decides on the combination of the factors of production necessary to produce goods or services with the aim of generating profit. An example of enterprise is the CEO of a company. A reward for enterprise is profit.
What is the mobility of the factors of production?
The mobility of the factors of production refers to how easily firms can switch between different factors of production during the production process. The more mobile the factors of production, the more flexibility there will be in production. This means that the firm can be very responsive to changes in demand and is likely to make a profit.
What is opportunity cost?
Opportunity cost is the next best alternative given up or forgone when deciding.
Why do decision makers have to use opportunity cost?
Due to the problem of scarcity, choices have to be made on how to best allocate limited resources against competing wants and needs.
What is a production possibility curve?
Production possibility curves are economic models that considers the maximum possible production that a country can generate if it uses all of its factors of production to produce only two goods or services. Any two goods or services can be used to demonstrate this model but typically they are labelled with ‘consumer goods’ and ‘capital goods.’
What does this production possibility curve show?
The curve demonstrates the possible combinations of the maximum output this economy can produce using all of its resources (factors of production).
At A, its resources are sued to produce only consumer goods whereas at B its resources are used to produce only capital goods.
Points C and D both represent efficient use of an economy’s factors of production as both of these points fall on the curve.
Any point inside of the curve, E, represents as inefficient use of resources and any point outside of the curve is unattainable using the current level of resources.
What is economic growth and how is it shown on a production possibility curve?
Economic growth occurs when there is an increase in the productive potential of an economy. This is demonstrated by an outward shift in the entire curve. This shift is caused by an increase in the quality or quantity of the factors of production.
What is economic decline and how is it shown on a production possibility curve?
Economic decline occurs when there is any impact on an economy that reduces the quality or the quantity of the factors of production. This is demonstrated by an inward shift in the entire curve.
