Scarcity and choice

Question 1

what is the basic economic problem?

Answer 1

Scarcity
-wants are unlimited and resources are finite,

• so choices have to be made.

-resources need to be redistributed optimally

Question 2

define opportunity cost

Answer 2

the value of the next best alternative forgone

Question 3

what 3 things does the economy have to consider when producing goods?

Answer 3

•what to produce -determined by what the consumer prefers. consumers tell producers what they prefer by demanding goods and using spending votes

•how to produce it -seek profits and minimise production costs

•for whom to produce it- who ever can buy the good because they have the greatest purchasing power in the economy

Question 4

what is an economic good (3)

Answer 4

-goods that benefit society
-they have the problem of scarcity and have an opportunity cost
-they have value so consumers will pay for them

Question 5

what is a free good? give an example
(2)

Answer 5

-goods that have no opportunity cost because there is no scarcity of the good

-they are often freely available and not traded

-e.g. water

Question 6

what does a PPF stand for?

Answer 6

production possibility frontier

Question 7

what does a PPF depict?

Answer 7

-the maximum productive potential of an economy
-using a combination of goods and services
-when resources are fully and efficiently employed

Question 8

what else can a PPF curve show?

Answer 8

the opportunity cost of using the scarce resources

Question 9

-what do points that lie on the PPF illustrate?
-what do we need to determine which points are allocatively efficient?

Answer 9

-combinations of output that are productively efficient

-preferences

Question 10

what does ‘the law of diminishing returns’ state?

Answer 10

-as additional increments of resources are added to a certain purpose
-the marginal benefit from those additional increments will decline

Question 11

what does it mean if points are inside the PPF curve?

Answer 11

resources are not being used to their full productive potential

Question 12

define ‘the unemployment of economic resources’ in terms of a PPF curve

Answer 12

when there is the potential to use resources more efficiently which would shift production closer to the PPF curve

Question 13

-define renewable resources
-give examples

Answer 13

-resources that can be replenished
-wind, wood, water

Question 14

-define non-renewable resources
-give examples

Answer 14

-resources that are finite and scarce. once used they cannot be replaced
-coal, oil, precious metals

Question 15

what is a consumer good

Answer 15

• goods that we can use and enjoy
• the things we buy in shops

Question 16

• what is a capital good?
• give examples

Answer 16

• goods that are used in the productive process
  -they involve investments in increasing productive capacity.
• a machine

Question 17

what are the 4 factors of production?

Answer 17

Land
Labour
Capital
Enterprise

Question 18

is production outside of the PPF curve attainable?

Answer 18

no

Question 19

where on the PPF does it indicate that resources are being used efficiently?

Answer 19

on the line

Question 20

what is the consumption budget constraint?

Answer 20

a spending limit that shows the different combinations of goods and services a person can buy given their income and the price of the g&s

Question 21

define allocative efficiency

Answer 21

the mix of goods being produced represents the mix society most desires

Question 22

define comparative advantage

Answer 22

when a country can produce a good at a lower cost in terms of other goods / when a country has a lower opportunity cost of production

Question 23

define productive efficiency

Answer 23

when it is impossible to produce more of one good/service without decreasing the quantity produced of another service

Question 24

what is short run economic growth?

Answer 24

moving from inside the curve to on the curve. this involves making better use of existing productive capacity

Question 25

what is long run economic growth?

Answer 25

requires a shift in PPF curve to the right

Question 26

what causes long run economic growth/ a shift to the right in the PPF curve
(5)

Answer 26

• Discovering more raw materials

-increase the size of work force

-increase in capital stock (invest in new machines,factories)

-increase in labour productivity (better educated workers ect)

-improvements in tech which increases labour productivity

Question 27

what causes negative economic growth/ a shift to the left
(5)

Answer 27

-declining population

-firms closing down and stopping production

-natural disasters

-large scale net outword immigration

-lack of investment

Question 28

when do you get a straight PPF line?

Answer 28

-when the marginal opportunity cost is constant (the amount of giving up one good to produce another doesn’t change)

-not realistic

Question 29

when do you get a PPF concave to the origin?

Answer 29

when there is imperfect substitution (opportunity cost) and diminishing returns

Question 30

-when do you get a rotation of PPF?

-give an example.

Answer 30

-when you see improvements in one good/ service but not the other

Question 31

what is specialisation?

Answer 31

when a country/firm/ person concentrates on producing a particular good or service

Question 32

-when will countries specialise in producing goods?

-give example.

Answer 32

-when they have a comparative advantage

-Cuba produces sugar because of its favourable climate and fertile soil

Question 33

-what is division of labour?

-give example.

Answer 33

-when workers concentrate on different tasks within a firm

• a car building firm may have some who work on design, some who work on testing

Question 34

what is productivity of labour?

Answer 34

the output per worker, per period of time

Question 35

how does specialisation link to productivity of labour?

Answer 35

specialisation enables an increase in overall productivity because specialised workers can become more efficient

Question 36

what are the advantages of specialisation in the production of goods? (3)

Answer 36

-workers are trained to gain skills for one particular job so it takes less time to be trained

-firms can be more efficient when producing on a large scale, this can lower average costs

-makes a big production task manageable by spreading work out

Question 37

what are the problems with specialisation in the production of goods? (2)

Answer 37

-highly specialised jobs can be repetitive, this leads to boredom and possibly diseconomies of scale

-if one person is absent, the whole production line may slow down if other people can’t cover their job. Therefore, there needs to be flexibility

Question 38

what are the advantages of specialisation in trade? (4)

Answer 38

-world trade is highly specialised. Growth in world trade enables higher living standards, greater choice of goods and more competition

-countries don’t have to produce every good they need which would be impractical for smaller countries

-countries can make use of their best resources

• enables countries to import goods they otherwise wouldn’t be able to produce

Question 39

what are the disadvantages of specialisation in trade? (2)

Answer 39

-concentrating on a small number of goods can make an economy vulnerable

-it may hamper development if countries stick to producing primary products, which have low elasticity of demand

Question 40

what is a market?

Answer 40

-a product market refers to how a good is bought and sold
-the market will determine the price and quantity sold

Question 41

in economics we assume firms and consumers are..

Answer 41

rational

Question 42

what does rationality mean?

Answer 42

maximising economic welfare and making decisions to enable this

Question 43

what does rationality mean?

Answer 43

maximising economic welfare and making decisions to enable this

Question 44

-what is utility?
-what is the relationship between consumers and utility?

Answer 44

-how much people benefit from consuming a certain good
-consumers wish to maximise their utility. they will spend money on goods only if they believe the utility gained is greater or equal to the cost

Question 45

what is profit?
what is the formula for profit?

Answer 45

-the amount of money a firm gains after subtracting costs from its total revenue
- profit = total revenue - total costs