Scarcity and the Economic Problem Flashcards
Define scarcity.
A situation in which there is not enough of something to satisfy wants and needs; a situation of shortage in relation to demand.
What are economic goods? What do they involve?
Goods produced using scarce resources. Their production/consumption involves an opportunity cost.
Define Opportunity Cost.
Foregone production that resources could have been used for. E.g. Government provided covid vaccinations use scarce resources that could have been used for other things.
What are free goods?
Free goods are goods made without scarce resources. Therefore there is no opportunity cost.
Define “Land” as one of the FOPs.
Gifts of nature available for production.
Define “Labour” as one of the FOPs.
All human effort used in production, both mental and physical.
Define “Capital” as one of the FOPs.
Human-made resources used in production of other goods and services.
Define “Enterprise” as one of the FOPs.
Risk bearing and key decision making in business.
Define quantity, quality, and mobility.
How much, how good, and how easy it is to move.
What is the difference between Geographical and Occupational Mobility?
Geographical mobility refers to whether it can be moved from one PLACE to another, whilst occupational mobility refers to whether it can be moved between different USES.
What is the basic economic problem?
Choices made about how resources should be used, what should be produced, and who it should be produced for.
How geographically mobile is Land?
The physical land itself cannot be moved (highly immobile). However, the natural resources are more mobile.
How geographically mobile is Labour?
Humans are generally mobile. However, it depends on a few things. E.g. Cost of production, their want to stay where they are currently, transport, culture, cost of living, communication, and income.
How geographically mobile is Capital?
Capital is generally very mobile (tools and machinery). However, some are not (teachers, buildings, etc.).
How geographically mobile is Entrepreneurship?
Most mobile.
How occupationally mobile is Land?
Physical space can be used for many different things (highly mobile) and so can natural resources (wheat can be used for bread, pizza, cereal; etc.). However, some laws do restrict the occupational mobility of Land.
How occupationally mobile is Labour?
Generally, people can change jobs easily. However, it depends on a few things (cost of living, wages, age, quality of workspace, education skills, and how happy someone is with their job.
How occupationally mobile is Capital?
Capital is rarely used for different uses. It depends on how specialized and how creative one is.
How occupationally mobile is Entrepreneurship?
Most mobile. Not industry specific.
What are some things that increase the amount of physical Land?
Landscaping (terracing, man-made islands, drain swamplands, dams to alter the course of water) and building higher vertical space.
What are some things that reduce the amount of physical Land?
Unsustainable deforestation, overhunting, and overfishing.
What are some things that improve the quality of Land?
Fertilizers and other measures to improve soil quality (mixed farming and crop rotation).
What are some things that worsen the quality of Land?
Drought, pollution, global warming, fertilizers, and natural disasters.
What are some things that increase the quantity of labour?
A country with a high birth rate, a country with lots of immigration, the ability for women to work, and a country where people take late retirements.
What are some things that decrease the quantity of labour?
A country with lots of emigration, a country with an ageing population, a country where it is illegal for women to work, and a country where there is a high death rate.
What are some things that affect the output of a worker?
Quality of workspace, amount of vacation/sick days, culture, relation between employers and employees.
What increases the quantity of capital?
Investment (spending by firms on capital).
What decreases the quantity of capital?
Depreciation (over time, the capital gets worn out)
Define Net Investment.
Net investment is the overall amount by which capital increases or decreases over time.
What increases the quality of Capital?
New technology (STEM education, increased funding for universities and research institutes for development and research, and countries being open to trade).
What increases the quality and quantity of Entrepreneurship?
Tax breaks, promoting competition, training, special visas for entrepreneurs, low taxes, and low-rate loans for entrepreneurs.
How does opportunity cost affect decision-making for consumers?
Money is a scarce resource for consumers (students are limited to a set amount of allowance, working adults are limited to their salary and old people are limited by their pension).
How does opportunity cost affect decision-making for workers?
Time is a scarce resource (workers are limited to a set amount of jobs, time to work on a task, and the number of free days/vacation.
How does opportunity cost affect decision-making for producers?
Land, Labour, Capital, and money are scarce resources (producers are limited to a set size of physical land, the number of workers working, and the amount of money to spend on all three FOPs).
What is a PPC diagram?
A simple model which shows the maximum output of two types of products and the combinations with available resources.
Define Production capacity.
How much production an economy is capable of.
Why may a PPC curve shift outwards?
Productive capacity increases because there is more productivity and resources.
Why may a PPC curve shift inwards?
Productive capacity decreases because there is less productivity and resources.
Define Economic agents/actors
Anyone who makes economic decisions or undertakes economic activity.
Define Stakeholders.
Anyone or group affected by a decision.
Name the different Economic Systems.
Planned (more government involvement), Mixed (combination), and Market (less government involvement).
Define Economic System.
The structure of an economy and who makes decisions about what, how much, and for whom to produce.
What happens in a Planned economic system?
Government makes decisions, the government owns almost all (Land, Capital and employs workers), the state gives instructions to entrepreneurs, and the government provides basic needs (housing, transport, and school).
What happens in a Market economic system?
Consumers decide what to produce (preference is signalled by the price mechanism), with almost no government interference, privately own Land Capital, tries to provide the best quality with low money used to make, and those who earn the most income have the most power on how to produce, those who are most skilled get better wages.
What happens in a Mixed economic system?
Some government intervention, a mix between planned and market systems, seeks to get all advantages of both systems.
Define price mechanism.
How a change in price allocates resources to their best use in a market economic system.
Give an example of a price mechanism.
For example, if the weather gets colder, the demand for hot packs would increase so firms would produce more and more hot packs and produce less and less ice packs and use more capital and land for hot packs.
What are some aspects of a market economy?
The firms are owned by the private sector, profit motives act as incentives for owners and managers, prices are determined by supply and demand, incentives for firms to be efficient and cut costs, and free market likely lead to income and wealth inequality, some examples are Singapore, and Hong Kong, and some problems are inequality, market failure and monopoly.
What are some aspects of a planned economy?
Industry owned and managed by the Government, governments give little incentives to be efficient and profitable, the government is more equitable in the distribution of resources, some examples are China and Cuba, and some problems are that it is inefficient, bureaucratic, there are shortages/surpluses, less choice, and less freedom.
Define demand.
The quantity of a goof or service that consumers are willing and able to buy at any given price.
Define quantity demanded.
A specific amount demanded at a specific price.
Define demand schedule.
Prices and their corresponding quantities are shown in a table.
What does it mean that the supply curve is downwards-sloping?
If price increases, quantity demanded decreases, and if price decreases, quantity demanded increases.
What are some factors that shift demand?
A change in the price of a substitute or complement, a change in income, changes in tastes or fashion or advertising, change in the population size or demographic.
Define supply.
Supply is the quantity consumers are willing and able to sell at any given price.
What does it mean that the supply curve is upwards-sloping?
If price increases, quantity demanded also increases, and if price decreases, quantity demanded also decrease.
What are some factors that shift supply?
Changes in costs, subsidies, taxes, weather, disaster, war, and the discovery/depletion of resources.
When does market equilibrium occur?
Equilibrium occurs at a price when the quantity supplied is equal to the quantity demanded. This is also known as the market clearing price because there is no shortage or surplus.
What happens if the price is above equilibrium?
The quantity demanded will be lower than the quantity supplied which is known as a surplus.
What happens if the price is below equilibrium?
The quantity demanded will be higher than the quantity supplied which is known as a shortage.
When does disequilibrium occur?
When there is a shortage or surplus.
What happens if there is a surplus?
Producers lower prices to help eliminate the surplus, and the lower price causes an extension in demand and a contraction in supply until a new equilibrium is formed.
What happens if there is a shortage?
Producers raise prices to help eliminate the shortage, and the higher price causes a contraction in demand and an extension in supply until a new equilibrium is formed.
What happens in a shift out of supply (In a demand and supply curve)?
A shift out of supply causes an extension along the demand curve. Price falls and quantity sold increases.
What happens in a shift inwards of supply (In a demand and supply curve)?
A shift inwards of supply causes a contraction along the demand curve. Price rises and quantity sold decreases.
What happens in a shift out of demand (In a demand and supply curve)?
A shift out of demand causes an extension along the supply curve. Quantity sold increases and price increases.
What happens in a shift inwards of supply (In a demand and supply curve)?
A shift inwards of demand causes a contraction along the supply curve. Quantity sold decreases and price decreases.
Define Gross Investment.
Spending by firms on capital.
Define Net Investment.
Gross Investment - Depreciation.
Define Microeconomics.
The study of behaviour and decision making of individuals and firms, and the performance of individual markets.
Define Macroeconomics.
The study of the whole economy.
Define Economic Agents.
Decision makers in the economy.
What is an Inferior good?
An inferior good is a product for which demand decreases when income increase. E.g. Instant foods or frozen foods.
Define Price Elasticity of Demand.
The responsiveness of demand to changes in price.
When does Elastic Demand occur?
Consumers are relatively sensitive to changes in price. %change in Qd > %change in Price.
When does Inelastic Demand occur?
Consumers are not relatively sensitive to changes in price. %change in Qd < %change in Price.
How do you calculate PED?
PED = %change in Qd / %change in Price. Always negative because of the downward slope (LAW OF DEMAND).
What is the significance of PED for Firms?
The knowledge of PED helps firms maximise total revenue. Firms know that if demand is inelastic they should increase prices and vice versa when demand is elastic.
What is the significance of PED for Governments?
Knowledge of PED helps governments understand the impact of taxes. Taxes on goods with elastic demand will cause a significant fall in quantity sold. Taxes on goods with inelastic demand will cause only a slight fall in quantity sold.
What is the significance of PED for Consumers?
When consumers have inelastic demand they are more likely to be affected by high prices and poor quality as firms know that consumers have little choice but to buy the good.
What does it mean if PED is Perfectly Elastic?
There is unlimited demand but only at one price. This means if the producer increases the price in any way, consumers will change to a different producer or supplier.
What does it mean if PED is Perfectly Inelastic?
Demand remains constant whatever the price. This means that even if producers keep increasing prices, there will be the same amount of demand as before.
Define Price Elasticity of Supply.
The responsiveness of supply to a change in price.
