Section 1 Flashcards
What is the economic problem?
The economic problem is that consumers have infinite wants for goods and services but there are only a finite number of resources available to satisfy these wants. Therefore, an economic choice has to be made to decide the best way in which to allocate these resources.This leads to an opportunity cost as the next best alternative is forgone.
What 3 choices have to be made before producing a good or service?
What to produce?
How to Produce?
For whom to produce?
What are the 4 factors of production? What are their payments?
Land,Labour,Capital and Entreprenurship. Rent,Wages,Interest and profit.
What are economic goods?
They are good which have required scarce resources to be used in their production.
What is an opportunity cost?
It is the value lost of the next best alternative forgone when an economic decision is made.
What are free goods?
They are goods that do not require the use of scarce resources in their production. There is no opportunity cost associated with their production.
Definition of the 4 factors?
Land- All natural resources used.
Labour-All human effort used (Physical and Mental)
Capital-Man made goods that are used to produce other goods.
Entreprenur-The risk taker who organises the other factors of production.
What are rational households and firms considered to be?
Rational households are considered to be utility maximisers. Firms are considered to be profit maximisers.
What do houselholds provide firms and what do they get in return?
They provide firms with factors and firms reward them with factor payments.
What is an economic system?
It is a network of organisations and institutions engaged within society to allocate scare resources in a way to maximise social welfare.
What is a pure market economy?
This is an economy with 0 government intervention where the price mechanism is responsible for allocating resources. This is where the means of production are privately owned.
What are the advantages of a pure market economy?
Encourages entreprenurs to take risks as profit is an incentive.
Increased efficiency as only the highest quality of products will be demanded.
Increased choice- as firms have an incentive to produce innovative goods and services.
What are the disadvantages of a pure market economy?
May lead to inequality
Goods with high demand may not be produced eg life saving drugs
Monopolies may arise.
What is a pure command economy?
This is when their is complete government intervention in the market. Resources are allocated via a state planning mechanism.The means of production are state owend.
What are the advantages of a pure command economy?
Maximum social welfare they can make sure jobs pay the same
Low unemployment the gov can try and provide jobs for everyone
No monopolies.
