Chapter 1: The economic problem and opportunity cost Flashcards
What is the basic economic problem also known as?
The problem of scarcity
Define scarcity
A situation that arises because people have unlimited wants in the face of limited resources
What’s the difference between wants and needs?
Needs are necessary for human life and wants are things that people would like to consume
Define economic goods
Goods that are scarce
Define free goods
Goods such as the Earth’s atmosphere that are not normally regarded as being scarce
Define poverty
A situation in which individuals lack the basic necessities of life or have low incomes relative to their fellow citizens
What is the key issue that arises from the existence if scarcity?
It forces people to make choices
What is economic analysis about?
Seeking to understand those choices made by individual people, firms and governments
Define firm
An organization that produces output (goods or services)
What do economic aims look at?
The causes and consequences of choices in an objective way
Define positive statement
A statement about what is i.e. about facts
Define normative statement
A statement involving a value judgement about what ought to be
Define value judgment
A statement based on your opinion or beliefs, rather than on facts
Name the 3 economic agents
- Households
- Firms
- Government
What do households make choices about (2)?
- Their expenditure
2. The supply of their labour
Why do firms exist?
In order to produce goods or services
Name 3 decisions firms have to make
- What to produce
- How to produce it
- Whom to produce for
What does the government do?
Undertakes expenditure and influences the economy through its taxation and regulation of markets
Name 2 choices the government makes
- Which activities to support through its spending programme
- How heavily it needs to tax households and firms to raise revenue in order to fund their expenditure
What is the way that resources are used in the economy determined by?
The actions of the 3 economic agents
What’s a household’s objective?
Utility/satisfaction maximisation
What’s a firms objective?
Profit maximisation
Name 5 things that could be the government’s objective
- Raise revenue through taxation
- Pursue it’s expenditure programme
- Meet environmental targets
- Avoid excessive unemployment
- Enable the economy to grow over time
Evaluate the behaviour of economic agents (5)
- Will they always act rationally?
- Households may choose to donate money to charity or spend their time helping others
- An example may be taking out an expensive gym membership but not making full use of it
- Firms may choose to sponsor a local football team
- Government decisions may be based on imperfect information or be influenced by political considerations
Define factors of production
Resources used in the production process, or inputs into production, including labour, capital, land and enterprise
Define labour
A key input into production
Define capital
A stock of past production used to aid current production
Give an example of capital
Machinery
Define entrepreneur
Someone who organises production and identifies projects to be undertaken, bearing the risk of the activity
Define land
Covers the inputs provided by nature
Define the production process
The way in which these inputs are combined in order to produce output is another important part of the allocation of resources
What’s the reward for labour?
Wages
What’s the reward for capital?
Interest
Define interest
The return on the use of capital services
What’s the reward for enterprise?
Profit
What’s the reward for land?
Rent
What does the amount of output in a period depend upon?
The inputs of factors of production
Define opportunity cost
In decision making, the value of the next best alternative forgone
Define PPC
A curve showing the maximum combinations of goods or services that can be produced in a set period of time given available resources
In figure 1.1 state:
- Point C
- Point D
- Point E
- The maximum combinations that can be carried out
- It is unobtainable as he does not have the time or resources
- When resources are used inefficiently by perhaps giving up or spending his time watching tv
Define trade off
A situation in which the choice of one alternative requires the sacrifice of another
What does figure 1.2 show?
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
Define capital goods
Goods used as part of the production process, such as machinery or factory buildings
Define consumer goods
Goods produced for present use (consumption)
What are capital goods used for?
To increase the future capacity of the economy
Define investment
Expenditure of capital goods
What are consumer goods for?
Present use
Why may a PPC be drawn as a curve instead of a straight line?
Not all factors of production are equally suited to the production of both sorts of goods
Illustrate long-run economic growth on a PPC
Figure 1.4
Why may a PPC shift outwards
An expansion in the availability of inputs / increase in productivity
Define long-run economic growth
An expansion in the productive capacity of the economy
How is the concept of opportunity cost useful?
It focuses on the true costs involved in making a choice
What does moving along the PPC show?
That there is an opportunity cost because producing more of one good means producing less of another
What happens as society increases its stock of capital goods (3)
- The productive capacity of the economy increases
- PPC moves outwards
- This is long-run economic growth
