Chapter 1- The Basic Economic Problem

Question 1

Define the economic problem

Answer 1

The fundamental economic problem is that there is a scarcity of resources to satisfy all human wants and needs

Question 2

What is the difference between a free good and an economic good?

Answer 2

A free good are those which are abundant in supply such as air and sunlight. An economic good are those which are scarce in supply and so can only be produced with an economic cost or consumed at a price.

Question 3

List and explain the four factors of production and their rewards

Answer 3

Land - all natural resources in an economy. Includes lakes, rivers, forests, mineral deposits. The reward for land is the rent it receives

Labour- all Human Resources available in an economy. This includes the physical and mental effort of skilled workers. The reward for labour is wages/salaries

Capital- all man-made resources available in an economy. This includes machinery. The reward for capital is the interest it receives.

Enterprise- the ability to take risks and run a business venture or firm. The reward for enterprise is the profit generated by the business

Question 4

Define opportunity cost

Answer 4

The next best alternative that is sacrificed in order to satisfy the other

Question 5

Define PPC

Answer 5

The maximum combination of two goods that can be produced by an economy with all available resources.