Economic Probelm, Economic Agents & Opportunity Cost

Question 1

Basic Economic Problem

Answer 1

Basic Economic Problem: How to allocate resoucres given unlimited wants & needs

Question 2

Scarcity

Answer 2

Scarcity: Gap between limited resouces & unlimited wants

Question 3

Factors Of Production (FOP)

Answer 3

• Labour: Human input into the production process (e.g workers)
• Land: Natural resources, incl. physical land & resoucres in it (e.g minerals)
• Capital: Man-made input, goods which are made to produce (e.g machinery)
• Enterprise: Organisation of FOP (e.g Elon Musk)

Question 4

Opportunity Cost

Answer 4

Opportunity Cost: Sacrifice of next best alternative foregone when a choice is made

Free Goods: Good w/ 0 opp. cost (e.g air)

Economic Goods: Have degree of scarcity, cost associated w/ cosuming/producing. Scarcity makes goods valuable, means people willing to pay for it

Question 5

Opportunity Cost & Economic Problem

Answer 5

• In the short term, FOP are limited, there is scarcity & opp. cost. One good has to be scarficed to produce more of the other (Unless FOP are not being fully employed)
• In the long term PPF shifts outwards as FOP grow, able to produce more of a good

Question 6

Economic Agents

Answer 6

• Households: Use/consume g&s, provide labour for firms
• Firms: Producers of g&s. Purchasers of g&s used in production
• Government: Use taxation & spending to influence microeconomy (for a single product) & macroeconomy (for the
  entire economy)
• Also gives benefits to unemployed
• Gov has other tools, used to influence economy & improve society.

Question 7

Objectives of Economic Agents

Answer 7

• Households: Utility (satisfaction, pleasure gained from purchases. Aim to maximise utility (subject to budget). Trade off between work & leisure
• Firms: Profit (return to entrepreneurs for risk), aim to maximise revenue & minimise costs. Trade off between reinvesting & taking profit/where to allocate profit
• Gov: Stimulate economic growth, maximise welfare through providing resources, subsidies, banning goods etc.

Question 8

Why Economic Agents Act Irrationally

Answer 8

Households:
- Emotion/ Impulse: Spend on something that does not make financial/ utility sense
- Time Pressures: Decisions made in haste, quicker to buy 1st product than do research
- Inertia: Reluctant to change behaviour due to loyalty/ease/status quo

Firms:
- Survival: When entering new market, profit is not main objective, focus on surviving
- Social Objectives: Aim to give back to community/ improve lives (e.g charity)
- Growth: Want to maximise growth instead of profit

Gov:
- Political Cycles: Make decisions to get reelected
- Unclear Info of Future: May invest in something they believe will be benifiicial, but isn’t. Based on predictions
- Incentive Problems: Public may not respond appropriately to gov incentive (e.g free education not appreciated)