The Basic Econ Problem Flashcards
Distinguish between economic good and free good
E- anything that is carve and therefore can be traded
F- those not typically considered to be scarce e.g. The atmosphere
What is meant by the basic economic problem
How to best allocate the scarce resources available amounts their alternative uses to most efficiently meet unlimited demand of consumers.
Implications of the basic economic problem
Scarcity and choice
The need to prioritise the consumption of commodities - cannot satisfy all wants. Governments need to decide between alternative uses of resources.
Choices forced by scarcity must consider long term implications of hooves to achieve sustainability in the future.
Distinguish between normative and positive statements
Normative - value judgments of what ‘ought to be’
Positive - statements including facts that may be supported with data
Needs vs wants
Needs- what is necessary for human life
Wants - what people would like to consume
Scarcity
The situation that arises when people have unlimited demands in the face of limited resources
Evaluate the problem f scarcity and the requirement to make choices
Problems forced by scarcity must consider long term implications in order for sustainability. There is a need the weigh the merits of alternatives sufficiently (info failure/ opp cost)
E.g. Clearing large areas of rainforest has implications for its future sustainability and in tune the planets.
Impact of sustainability of scarcity and choice
Sustainability is essential for maintaining the availability of resource in future - thus to prevent further scarcity and lack of choice
Explain the roles of economic agents
Government - decision with expenditure. Influence economy through taxation and regulation of markets
Firms- exist to produce output. What g/a to produce, how and for whom?
Households- consumers decide what g/s to spend on, decisions regarding their supply of labour
Factors of production and their rewards
FOP: equipment used in the production process; inputs onto production, including CELL.
Capital: equipment used on the production process, invested in for future output, e.g. Tractor. Reward: profit.
Enterprise: the ability and willingness to take risks in order to achieve profit
Land: anything above, below or on the land or sea. Territory as well as animals, mined goods, re/un newable resources. Return on land is rent
Labour: the ability and willingness to supply a given amount of hours at a certain time period in exchange for wages/ salary
Strengths and weaknesses of the market economy
Market economy: where market forces (invisible hand/ market mechanism) are allowed to guide the allocation of resources amongst a society.
Pros
- incentive for efficiency
- broad consumer choice
- answers to coordination problem question of what/how/whom
- consumers available to g/a they demand = satisfaction
Cons
- monopoly power
- inequity / wage gap
- non profitable goods may not be produced (rare Medicine)
Role of the government within a market economy
The role of the government is limited, but nonetheless important. Essential are legal and property frameworks in order to indirectly intervene with the production process
Opportunity cost
In decision making, the next best alternative forgone
Trade off
A decision that requires distorting one choice for another. A trade-off involves a sacrifice that must be made to get a certain product or experience.
PPC
A curve showing the maximum combinations of goods or services that can be produced in a set period of time given available resources
