Micro - The basic economic problem

Question 1

What is the basic economic problem

Answer 1

The basic economic problem is the fact that resources are scarce(limited in supply) but wants are infinite (never ending). As a result of this, consumers, producers and the government have to make choices about how to allocate scarce resources

Question 2

What is opportunity cost

Answer 2

Value of the next best alternative foregone because we choose to allocate scarce resources elsewhere

Question 3

Name, describe and give examples for the 4 factors of production(10)

Answer 3

LAND

• All natural resources used in production
• for example building land, oil, water, wheat, apples

LABOUR

• The human contribution to production
• i.e. workers

CAPITAL

• Capital refers to man-made equipment that is developed to aid the production of other goods and services
• For example machines, computers, vehicles, shop fixtures, tills

ENTERPRISE
-The person(s) who has the initial business idea, raises the money and organises the other
factors of production.

Question 4

Name, describe and give examples for the 3 different sectors(9)

Answer 4

Primary sector

• The sector of the economy responsible for extracting resources from the natural environment
• e.g. Fishing, mining, farming

Secondary sector
-The sector of the economy that is responsible for manufacturing and construction (ie using the primary resources to make goods and services)
-e.g. Textiles, Food manufacturing; Car
manufacturers

Tertiary sector

• The sector of the economy responsible for providing services to consumers and to other businesses
• e.g. Banking, Insurance, Leisure and Tourism; Catering; Advertising and Marketing

Question 5

Describe public enterprises(4)

Answer 5

Owned by the government on behalf of the people

Controlled by the government

Aims to provide a good quality public good or service; To allow as many people as possible access to the good or service

Money will be raised from the taxpayer; Any losses will be funded by the taxpayer; The business/area could continue even if it was loss making

e.g. Education, Health, Police, Defence

Question 6

Describe private enterprises(4)

Answer 6

Owned by private individuals such as sole trades, partnerships or limited companies

Controlled by the owners/shareholders, daily activities controlled by managers

Main aim is to make a profit

Finance could be from shares, loans, savings etc

e.g. Water, Electricity, Gas, Rail, Airlines, Supermarkets, Clothes stores

Question 7

Describe a free market economy(2)

Answer 7

All resources are owned by the PRIVATE SECTOR

Goods and services are allocated via the MARKET MECHANISM, that is via demand and supply (prices)

Question 8

Describe a planned economy (3)

Answer 8

All resources are owned by the PUBLIC SECTOR

The public sector determines what goods and services are made and how

Goods and services are “shared out” amongst the population

Question 9

Describe the pros of a planned economy(3)

Answer 9

It is fair, everyone will get something

Theoretically, everyone can be given a job

The government can provide merit goods such as health and education, and public goods such as defence

Question 10

Describe the cons of a planned economy(4)

Answer 10

There is no incentive to be efficient

There will be little choice for consumers or workers

There may be corruption

Economic growth tends to be low because of the lack of profit incentives

Question 11

Describe the pros of a free market economy(2)

Answer 11

There is competition- this is good for consumers (Low prices, better quality, more choice, more innovation)

There is more incentive to be efficient as low costs can allow low prices which may be important if markets are competitive

Question 12

Describe the cons of a free market economy(3)

Answer 12

Inequality- there will be absolute and relative poverty- poor people will be reliant on charity and will have no choice

Public and merit goods may not be provided/will be under
produced/consumed- eg not enough access to education and health care

Environmental costs (eg pollution) is likely and there is no incentive to look at sustainable use of resources

Question 13

Describe a mixed economy

Answer 13

There is a mixture of a public sector and a private sector owning and allocating the scarce resources, and contains the best features of the free market and the planned economy

Question 14

Define specialisation

Answer 14

A business or individual focuses on the production of a limited scope of products or services in order to gain greater degrees of productive efficiency

Question 15

Describe the advantages of specialisation of labour(4)

Answer 15

Increased productivity as a result of expertise and repetition.

Time is not wasted moving from one job to another

Makes more efficient (planned) use of scarce capital

Specialised workers tend to get higher pay

Question 16

Describe the disadvantages of specialisation of labour(2)

Answer 16

Repetition leads to boredom, de-motivation and a reduction in productivity(disincentive effect)

Greater costs due to wages and training

Question 17

What is product specialisation

Answer 17

A firm focuses its production on one, or a very narrow range of products

Question 18

Describe the advantages of specialisation of products(4)

Answer 18

The firm can buy resources to make the product in bulk

The firm gains a reputation as an “expert” in the field, this can stimulate demand and make it more price inelastic
-could contribute to a degree of monopoly power in the market

The firm can have very specialist buyers and sellers and can focus its research and development budget on one product

Question 19

Describe the disadvantages of specialisation of products(4)

Answer 19

It is very risky “all the eggs in one basket”- a decline in the demand for the particular good or service would be catastrophic for the firm

It cannot take advantage of cross-subsidising products

It does not take advantage
of having existing customers who may wish to also buy a range of products from the firm, including compliments (and impulse buys)

Consumers increasingly want to buy a range of products under one roof for convenience- they may go elsewhere

Question 20

What is international specialisation

Answer 20

Countries specialise in producing goods in which they have an absolute or comparative advantage

Question 21

Describe the advantages of specialisation of contries(4)

Answer 21

World output of goods is increased as all countries focus on what they are good/efficient at and then trade

Because Average Costs are lower, prices may be lower

Encourages free trade, competition and choicegood for consumers

Takes account of the fact that climates and resource endowments vary between countries

Question 22

Describe the disadvantages of specialisation of countries(6)

Answer 22

Requires trade to allow the exchange of goods and services- this may be affected at times of war/unrest

Countries may be unable to access certain G&S if trade is disturbed

Some products (such as primary products) have lower prices and more unstable prices. 
  -Countries specialising in these find it hard to develop and grow (LDC’s)

Countries will be vulnerable if there is a downturn in world demand for the products that they specialise in

Trade and international competitiveness may be undermined by fluctuations in exchange rates

Question 23

Describe the functions of money(8)

Answer 23

A means of exchange
-Money allows people to exchange one good for another

A unit of account
-Money allows the value of one good to be expressed in terms of another

A store of value
-Money allows you to save

A method of deferred payment
- You can “buy now pay later”