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Microeconomics > Chapter 1: The economic problem and opportunity cost > Flashcards

Chapter 1: The economic problem and opportunity cost Flashcards

1
Q

What is the basic economic problem also known as?

A

The problem of scarcity

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2
Q

Define scarcity

A

A situation that arises because people have unlimited wants in the face of limited resources

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3
Q

What’s the difference between wants and needs?

A

Needs are necessary for human life and wants are things that people would like to consume

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4
Q

Define economic goods

A

Goods that are scarce

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5
Q

Define free goods

A

Goods such as the Earth’s atmosphere that are not normally regarded as being scarce

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6
Q

Define poverty

A

A situation in which individuals lack the basic necessities of life or have low incomes relative to their fellow citizens

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7
Q

What is the key issue that arises from the existence if scarcity?

A

It forces people to make choices

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8
Q

What is economic analysis about?

A

Seeking to understand those choices made by individual people, firms and governments

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9
Q

Define firm

A

An organization that produces output (goods or services)

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10
Q

What do economic aims look at?

A

The causes and consequences of choices in an objective way

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11
Q

Define positive statement

A

A statement about what is i.e. about facts

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12
Q

Define normative statement

A

A statement involving a value judgement about what ought to be

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13
Q

Define value judgment

A

A statement based on your opinion or beliefs, rather than on facts

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14
Q

Name the 3 economic agents

A
  1. Households
  2. Firms
  3. Government
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15
Q

What do households make choices about (2)?

A
  1. Their expenditure

2. The supply of their labour

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16
Q

Why do firms exist?

A

In order to produce goods or services

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17
Q

Name 3 decisions firms have to make

A
  1. What to produce
  2. How to produce it
  3. Whom to produce for
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18
Q

What does the government do?

A

Undertakes expenditure and influences the economy through its taxation and regulation of markets

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19
Q

Name 2 choices the government makes

A
  1. Which activities to support through its spending programme
  2. How heavily it needs to tax households and firms to raise revenue in order to fund their expenditure
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20
Q

What is the way that resources are used in the economy determined by?

A

The actions of the 3 economic agents

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21
Q

What’s a household’s objective?

A

Utility/satisfaction maximisation

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22
Q

What’s a firms objective?

A

Profit maximisation

23
Q

Name 5 things that could be the government’s objective

A
  1. Raise revenue through taxation
  2. Pursue it’s expenditure programme
  3. Meet environmental targets
  4. Avoid excessive unemployment
  5. Enable the economy to grow over time
24
Q

Evaluate the behaviour of economic agents (5)

A
  1. Will they always act rationally?
  2. Households may choose to donate money to charity or spend their time helping others
  3. An example may be taking out an expensive gym membership but not making full use of it
  4. Firms may choose to sponsor a local football team
  5. Government decisions may be based on imperfect information or be influenced by political considerations
25
Q

Define factors of production

A

Resources used in the production process, or inputs into production, including labour, capital, land and enterprise

26
Q

Define labour

A

A key input into production

27
Q

Define capital

A

A stock of past production used to aid current production

28
Q

Give an example of capital

A

Machinery

29
Q

Define entrepreneur

A

Someone who organises production and identifies projects to be undertaken, bearing the risk of the activity

30
Q

Define land

A

Covers the inputs provided by nature

31
Q

Define the production process

A

The way in which these inputs are combined in order to produce output is another important part of the allocation of resources

32
Q

What’s the reward for labour?

A

Wages

33
Q

What’s the reward for capital?

A

Interest

34
Q

Define interest

A

The return on the use of capital services

35
Q

What’s the reward for enterprise?

A

Profit

36
Q

What’s the reward for land?

A

Rent

37
Q

What does the amount of output in a period depend upon?

A

The inputs of factors of production

38
Q

Define opportunity cost

A

In decision making, the value of the next best alternative forgone

39
Q

Define PPC

A

A curve showing the maximum combinations of goods or services that can be produced in a set period of time given available resources

40
Q

In figure 1.1 state:

  1. Point C
  2. Point D
  3. Point E
A
  1. The maximum combinations that can be carried out
  2. It is unobtainable as he does not have the time or resources
  3. When resources are used inefficiently by perhaps giving up or spending his time watching tv
41
Q

Define trade off

A

A situation in which the choice of one alternative requires the sacrifice of another

42
Q

What does figure 1.2 show?

A

The combinations of the two crops that could be produced. There is a trade off between the production of potatoes and onions associated with a movement along a PPC

43
Q

Define capital goods

A

Goods used as part of the production process, such as machinery or factory buildings

44
Q

Define consumer goods

A

Goods produced for present use (consumption)

45
Q

What are capital goods used for?

A

To increase the future capacity of the economy

46
Q

Define investment

A

Expenditure of capital goods

47
Q

What are consumer goods for?

A

Present use

48
Q

Why may a PPC be drawn as a curve instead of a straight line?

A

Not all factors of production are equally suited to the production of both sorts of goods

49
Q

Illustrate long-run economic growth on a PPC

A

Figure 1.4

50
Q

Why may a PPC shift outwards

A

An expansion in the availability of inputs / increase in productivity

51
Q

Define long-run economic growth

A

An expansion in the productive capacity of the economy

52
Q

How is the concept of opportunity cost useful?

A

It focuses on the true costs involved in making a choice

53
Q

What does moving along the PPC show?

A

That there is an opportunity cost because producing more of one good means producing less of another

54
Q

What happens as society increases its stock of capital goods (3)

A
  1. The productive capacity of the economy increases
  2. PPC moves outwards
  3. This is long-run economic growth

Microeconomics (18 decks)

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