Scarcity, Choice and Opportunity Cost.

Question 1

What is the Economic Problem?

Answer 1

We have SCARCE resources to satisfy our UNLIMITED WANTS. As a result of scarcity, we have to make a CHOICE.

Question 2

What are Resources, and Factors of Production?

Answer 2

Resources are inputs available for the production of goods.
Factors of production are anything useful in the production of goods and services.

Question 3

Land. (Factor of Production)

Answer 3

Natural resources such as lakes, rivers, forests, the land that a factory or farm is built on, mineral deposits below the surface, climate, etc.

The reward for owning land is the income that is generated.

Question 4

Labor. (Factor of Production)

Answer 4

Human Resource. The determinant of this is a nation’s population, however not all of the population is available to work as some may be below or above working age and some may not choose to work.

The reward for owning land is salary/wage.

Question 5

Capital. (Factor of Production)

Answer 5

Any man-made aid to production. Helps land and labor produce more units of output. Capital can range from something as simple as a spade to a car-assembly plant.

The reward for owning capital is the rate of return earned.

Question 6

Enterprise. (Factor of Production)

Answer 6

Enterprise consists of two roles:
1. Organizes the other 3 factors of production.
2. Takes on the risk of production.

In small firms with few resources, the role of enterprise is taken on by a single Entrepreneur.
In larger and more complex firms, the role of organization is taken on by salaried managers whilst the shareholders take on the risk of production.

The reward for enterprise is profit.

Question 7

What is good factor endowment?

Answer 7

Some economies have a large quantity of good quality factors of production at their disposal. They can create lots of goods and services to satisfy the wants of their population. They are said to have good factor endowment.

Question 8

What is Production?

Answer 8

To create goods and services (which satisfy our wants), RESOURCES are combined in the process of production.

Question 9

What is Consumption?

Answer 9

The process through which individuals use up goods and services to satisfy wants is consumption.

Question 10

Explain needs and wants. How do needs and wants differ from one person to another? (Explain through scale of preferences)

Answer 10

Needs are things that are essential for survival such as food, water, shelter, clothing.
Wants are less essential but they improve our quality of life. They are luxuries.

What might be considered a luxury for one person may be considered a need for another.
This is because everyone has a scale of preferences, which is the product of upbringing, influences, culture, life-experiences. These influence our likes and disliked.

Question 11

What are consumer durables?

Answer 11

Some goods are used up quickly (food). Some satisfy our wants over a long period of time such as vehicles, houses, TVs, these are consumer durables.

Question 12

How are wants unlimited?

Answer 12

Our wants are continually expanding and changing.

Question 13

What is opportunity cost and how does it relate to choice.

Answer 13

Given unlimited wants and limited resources, we have to choose which wants to satisfy.
Opportunity cost is the price expressed in the form of the best alternative that is forgone when we choose.

Suppose we have $10, we go to a shop which sells chips for $5 and chocolates for $10 each.
Since we only have $10, we can’t choose both and therefor have to make a choice between them.
If we choose a chocolate, then we know that the opportunity cost of it was 2 chips.
And if we buy 2 chips, then we know the opportunity cost of it was 1 chocolate.

Question 14

What to Produce? How to Produce? And for whom to Produce?

Answer 14

Since we cannot produce everything, we have to choose what to produce and in what quantity. Do we produce better clothing and food to improve standard of living or better weaponry to improve our defenses?

We also have to decide how to use our resources so that the best outcome arises, the maximum use out of a resource. We also have to keep moral obligations and environmental health in mind.

We also have decide whose wants to satisfy. Will everyone have a more or less equal share of what is produced? Will some have more than others?

Question 15

What is ceteris paribus?

Answer 15

Other things remain equal. This simplifies an actual situation by assuming that part from a single change in circumstances, everything else is unchanged.

Question 16

What is the margin?

Answer 16

A small change in one economic variable will lead to further small changes in other variables. This predicts what the impact of a change might be.

Question 17

Describe all 3 time dimensions assessed with factors of production.

Answer 17

The world changes.

Short Run: It is possible only to change some inputs or increase/decrease them.
An example of this is labor, w/ ceteris paribus we can assume that if the amount of labor is increased, output will increase.

Long Run: All factors of production or resources can change. Building a new factory to increase outputs, etc.

Very Long Run: All factors of production as well as key inputs can change. Technology, government regulations, social considerations change over long periods of time.

Question 18

Describe positive and normative statements.

Answer 18

Positive statements are based on empirical evidence. “will”
Normative statements are when values or opinions come into analysis, they are subjective. “should”

Question 19

Describe specialization and exchange.

Answer 19

To increase goods and services in an economy, individuals, firms and nations concentrate on producing some goods and services (where they have an advantage) rather than others.

No one is self-sufficient, but they are specialists. So they produce a surplus and trade for the surplus of others.

Overtime specialists skills may become redundant, individuals need to be flexible and move between occupations.

Question 20

Describe division of labor.

Answer 20

The process of manufacturing is split into individual tasks instead of one individual creating one product. This is faster, manufacturing lines.

Question 21

What do specialization and division of labor help in?

Answer 21

These help in increasing output and meeting more wants.

Question 22

Describe Economic Structures.

Answer 22

Economic Structures organize an economy.

Primary: agriculture, mining, fishing, oil extraction, etc. Collecting raw materials.

Secondary: manufacturing activities. Food processing, textile, clothing, vehicle manufacturing, electronics. Using raw materials to create goods.

Tertiary: Service sector, covers a range of activities such as retailing, transport, banking, insurance, education, logistics, etc.

Quaternary: Knowledge based part of economy. Provision of information, scientific research, product development, computing and ICT.

As economies develop, their structure changes and progresses. Tertiary is the primary employer of developed countries.

Question 23

What is a market, and market mechanism.

Answer 23

A market is a place where buyers and sellers get together to trade.
Market mechanism is where decisions on price and quantity are made on the basis of supply and demand.

Question 24

Describe how choices are and can be made through the systems of resource allocation (economic systems).

Answer 24

1. Market/Free economy: decisions on allocation of resources are made by households and firms. They interact as buyers and sellers in the market for goods and services. Prices indicate the market value of a resource.
2. Planned Economy: Central planning boards and organizations make decisions in enterprises that are state-owned or under state regulation and control. Centralized and less issue with unemployment. The government takes responsibility for the allocation of resources, production targets setter, distributes income and determines wage, owns most productive resources and property, plans long-term growth.
3. Mixed Economy: Reality. Both private and public sectors in the process of resource allocation. Decisions on important economic issues require planning and interaction between govt, businesses and labor through market mechanism.

Govt: security, healthcare, transport, telecommunication.

Question 25

What issues are faced when economies transition and central planning is reduced?

Answer 25

Unemployment, need for social reform and robust tax regime needed. A difficult process.

Question 26

What is the role of Enterprise in the modern economy?

Answer 26

Provides retailing, provision of food and drink, hairdressing, dentistry, etc. WANTS.

Question 27

What are Production Possibility Curves? Utilization.

Answer 27

A representation of the maximum level of output that an economy can achieve when using it’s existing resources in full.

If the point lies on the graph, the resources are fully utilized. If the point lies below the graph, resources are under-utilized. If the point lies above the graph, it is not possible under current resources.
We can use PPC to represent opportunity cost.

Question 28

How do we increase the amount of resources, in PPC? Use capital consumption and investment.

Answer 28

To introduce growth, divert resources from current consumption to investment: increase efficiency, introduce technological advancement.

Capital consumption: capital required to replace that which is worn out.
Investment: creation of capital goods.

A PPC becomes tilted when technological advancement/efficiency impacts only 1 of the 2 goods/services present in PPC.

Question 29

What is reallocation of resources?

Answer 29

Where resources are deliberately moved from one product to another.

Question 30

What is factor mobility?

Answer 30

The each by which factors of production can be moved around. (Requires training/education.)

Question 31

What is Money? National Currency, Near Money.

Answer 31

Money is anything that is generally accepted as a means of payment to buy goods and services. It is vital for smooth operation of the economy.

National currency has little to no intrinsic value, but sellers have complete confidence in it’s value. It is usually portable and durable. Coins, Notes, Cheques, Credit Cards. It can also be in the form of a value commodity. (Gold/Platinum)

Near Money: Non-cash assets that can quickly and easily be turned into cash. Foreign currency, savings accounts, bonds and certificates of deposits.

Question 32

What is liquidity, how does it contribute to banks?

Answer 32

Liquidity is the extent to which there is an adequate supply of assets that can be turned into cash. (Near Money) They contribute to banks by providing a supply of cash if it is needed to meet their liabilities to deposits.

Question 33

What is a liability?

Answer 33

A debt obligation.

Question 34

When do people lose confidence in money?

Answer 34

When there is hyper-inflation.

Question 35

What are the functions of money?

Answer 35

Medium of Exchange, sellers willing to accept.
Unit of account, common monetary units.
Standard for deferred payments, monthly, annually.
Store of wealth, held in banks for long periods of time.

Question 36

What are private goods?

Answer 36

Goods that when consumed by someone, are not available to anyone else. These are scarce, a price is charged for them and are cost in terms of resources used.

They have excludability and rivalry.

Question 37

What are free goods?

Answer 37

They are not scarce, have no opportunity cost, no prices, no production needed. (Air, Water)

Question 38

What are public goods?

Answer 38

None-excludable, Non-rival, difficult to charge a direct price.
Lighthouse, Traffic Lights.

Question 39

What are Quasi Public goods?

Answer 39

Have some but not all characteristics of public goods. Space may be lessened with more people in public hospitals.

Question 40

What is excludability and rivalry in public goods?

Answer 40

It is possible to exclude someone from consumption through charging a price.

Consumption of one person reduces availability for others.

Question 41

What problems can be caused by public goods?

Answer 41

Free rider: someone who does not pay to use a public good.
Since everyone may wait for someone else to pay for it, it may never be provided. One may refuse to pay and still benefit OR the demand may not be registered on the market.

Question 42

What are merit and demerit goods?

Answer 42

Merit goods provide positive side effects upon usage and vice versa. Merit goods usually provided by govt.

Question 43

What is information failure?

Answer 43

When people do not have full or complete information of the goods or services they are purchasing.

People may not know the full value of education or the bad side effects of fast food.

Question 44

What is moral hazard?

Answer 44

Tendency for insured or protected people to take greater risks.

Question 45

What is adverse selection?

Answer 45

When information failure results in a consumer purchasing a product at lower quality or higher price than market price.