Chapter 1 - The economic problem and opportunity cost Flashcards
What is scarcity?
A situation that arises because people have unlimited wants in the face of limited resources
(e.g. food banks, charities)
What are economic goods?
Goods that are scarce
(e.g. gold, oil)
What are free goods?
Goods that are normally not regarded as being scarce
(e.g air)
What is poverty?
A situation in which individual lack the basic necessities of life or have low incomes relative to their fellow citizens
Scarcity and poverty are NOT the same thing
(e.g some parts of Africa where water is unavailable, Indian slums vs. luxury apartments etc.)
What is a firm/business?
An organisation that produces output
(e.g. Nike - shoes)
What is a positive statement?
Factual statement that can be tested
(e.g The Earth is round)
What is a normative statement?
An statement involving a value judgement about what ought to be
A value judgement is a statement based on your opinions or beliefs, rather than facts
(e.g. football is better than basketball)
What is the economic problem?
The problem is scarcity, because resources are finite but wants are unlimited. As a result, choices are to be made.
(e.g. If a household decides to buy a new car, they may need to cancel a planned foreign holiday)
What is the role of households?
They take decisions about the goods and services they wish to consume, and the amount of labour they wish to supply.
What is the role of firms?
Take decisions about what to produce and how to produce it
What is the role of governments?
They take decisions about expenditure, taxation and the regulation of the economy.
What do you need to consider about the behaviour of economic agents?
You need to consider whether economic agents will always make choices in a rational manner
Not all agents may act rationally
Households may donate money to charity, or spend time helping others. They may also spend on goods and services they don’t really want, like a gym membership that is rarely used
Firms may sponsor a local football team or encourage workers to volunteer or raise money for charity during working hours
Government may take decisions based on imperfect information or may be influenced by politics
What is the aim of rational consumers?
They aim to maximise their utility (satisfaction)
What is the aim of firms?
Firms may have differing objectives, but it is often assumed that they set out to maximise profits.
What might government decision be sometimes based on?
They might be based on imperfect information, or may be influenced by political considerations.
What is the definition of factors of production?
Resources used in the production process
What are the rewards for the factors of production?
Labour - wages and salaries
Capital - interest (return on the use of capital services)
Enterprise - profit
Land - rent
What is opportunity cost?
In decision making, the value of the next best alternative forgone
What is the definition of trade off?
A situation in which the choice of one alternative requires the sacrifice of another
What are capital goods?
Goods used as part of the production process, such as machinery or factory buildings.
What are consumer goods?
Goods produced for consumption
What does the PPC show?
It shows the maximum combinations of goods and services that can be produced in a period by a given set of resources.
What does moving along the PPC show?
Shows that there is an opportunity cost because producing more of one good means producing less of another
Describe the PPC for an economy
In a simple society producing 2 goods (consumer goods and capital goods), the choice is between consumption and investment for the future.
As society increases its stock of capital goods, the productive capacity of the economy increases, and the PPC moves outwards, which is called long run economic growth.
