Preliminary Exam Topic 1 Flashcards
90% - 100%
Define the Economic Problem
There are limited resources and an unlimited supply of wants - The economic problem seeks to solve how economist can best distribute resources to satisfy the largest number of wants.
What are the Key Economic Issues (4)
- What to produce: The economy cannot satisfy all wants, some must be sacrificed.
- How much to produce: How much of each G&S is required.
- How to produce: Most efficient method of production
- How to distribute production: the spread of resources amongst the population.
What is EQUITABLE and INEQUITABLE distribution - why is the decision between these two methods difficult?
Equitable - Distributed evenly over the entire population
Inequitable - Distributed unevenly over the entire population
Difficult because there is often a conflict between equity and efficiency - more efficient systems may produce less equitable outcomes.
Define a ‘WANT’
Material desires of an individual or community. Humans derive ‘utility’ from the consumption of wants.
Name the types of wants (3)
- Individual Wants
- Collective Wants
- Recurrent Wants
Define ‘INDIVIDUAL WANTS’
The individual desires of each person, dependent on personal preference and lifestyle factors.
Define ‘COLLECTIVE WANTS’
The wants of the whole community, largely provided by the government. Governments provide collective wants by using taxation revenue collected from the community.
Define ‘RECURRING WANTS’
Wants such as food and rent which need to be satisfied over and over again for survival.
Define ‘UTILITY’
Utility is the total satisfaction or benefit derived from consuming a good or service.
Define ‘OPPORTUNITY COST’
The value of the next best alternative that is foregone when a decision is made to allocate resources towards one particular option over another.
When we satisfy a want, we give up the opportunity of satisfying an alternative want. The real cost of this, therefore, not the money we pay for it, but the next-best alternative want that we have to forgo
Give an example of Opportunity Cost at Individual/Business/Government levels
The individual consumer: with limited resources (due to limited income) may choose between purchasing a car and a holiday. If she chooses the car, the opportunity cost is the travel.
The business firm: makes choices in the allocation of its scarce resources - An entrepreneur decides to produce a computer - OC is the opportunity to produce headphones with those resources.
The government has limited resources that it can use to satisfy community wants. If the government allocates resources to a new fleet of submarines, it may be at the expense of a new airport.
Define ‘THE PRODUCTION POSSIBILITY FRONTIER’
Graphical representation of the MAX combination of G&S that an economy can produce with existing resources and technology (assuming that all resources are efficiently utilised)
In general, an economy can choose between:
1. Produce G&S that will satisfy consumer demand immediately
2. Produce G&S that will increase future productive capacity
What types of goods would each of these options refer to?
Define and give an example of each.
- Consumer Goods - Handbag
are items produced for the immediate satisfaction of individual and community needs and wants. - Capital Goods - Advanced Machinery
items not produced for immediate consumption but will be used for the production of other goods.
Of course - when prioritising one type of good the sacrificing of the other is an example of opportunity cost.
Define ‘FACTORS OF PRODUCTION’ + Name the 4 Factors + Give an example for each.
Resources that can be used in the production of G&S; another name for a resource or input.
Factors:
1. Natural Resources (water)
2. Labour (Workers)
3. Capital (Assembly Belts)
4. Enterprise (Turning innovative ideas into action)
What is the reward for natural resources
Rent
What is the reward for Labour
Wages
What is the reward for Capital
Interest
What is the reward for enterprise
profit
In a market economy, what are decisions about how scarce resources are allocated in production are largely determined by?
Consumers’ spending patterns
Define ‘NATURAL RESOURCES’
All naturally occurring materials that are used in the production process
Define ‘RENT’
Rent goes beyond ‘renting property’ - it covers all the income rewards derived from the productive use of natural resources.
Capital goods are for private use… what is the public version?
Infrastructure (e.g roads)
Define ‘CAPITAL’
manufactured products used to produce goods and services.
- The produced means of production
Name 5 reasons why capital is important to society
Improves productivity of other resources - how much output produced per factor of production per unit of time.
Satisfy more wants and needs, though increased production.
Impacts the future earning capacity of an economy through increased production potential
Creates Jobs in the operation of the capital (machines)
Infrastructure development: Capital investment is essential for the development of infrastructure such as transportation networks, communication systems, and utilities.
Define ‘LABOUR’
Human effort, both physical and mental, used to produce goods and services.
The supply of labour for production depends on a number of factors (2)
Population - Influenced by a country’s birth rate, life expectancy and levels of immigration.
Availability/quality of labour resources (School leaving age, Retirement age, Social attitudes towards the role of women in the workforce, Educational standards, Amount of on-the-job training)
Wages include (5)
- Regular payments for a standard working week
- Executive salaries
- Commissions
- Fees for professionals
- Earnings of self-employed people.
Define ‘ENTERPRISE’
involves organising the other factors of production (natural resources, labour and capital) for the purpose of producing goods and services.
Brings together all the factors of production
