The Basic Economic Problem 1.1 Flashcards
Economic and Free goods 1.1
What are economic goods and how does it benefit society?
Economic goods benefit society, have the problem of scarcity and have an opportunity cost. Since they are scarce, they have some value, so consumers will pay for them and they can be traded
Economic and free goods 1.1
what are free goods?
Free goods have no opportunity cost, because there is no scarcity for the good. e.g. air and water are free goods; these goods are not traded because they are freely available
Scarcity 1.1
What is scarcity?
- Is the basic economic problem
- Wants are unlimited and resources are finite so choices have to be made
Positive and Normative statements 1.1
What is a positive statement?
- Positive statements are objectives.
- They can be tested with factual evidence, and can consequently be rejected or accepted
Look for words such as ‘will’ and ‘is’
Positive and Normative statements 1.1
What is a normative statement?
- Normative statements are based on value judgements.
- These are subjective and based on opinion rather tahn factual evidence
Look out for words such as ‘should’ and if the statement is saying one action is more credible than another
Economic Agents 1.1
What are the economic agents?
- Economic agents play a role in the economy, it is assumed that economic agents only act in their own interests:
- Governement - Aim to improve social welfare
- Firms - Aim to maximise profit
- Households - Aim to maximise utility
each faces scarcity and must make choices
Factors of Production 1.1
What are the Factors of production?
- Economic resources are the factors of production (CELL)
1. Capital
2. Entrepreneaurship
3. Land
4. Labour
Factors of Production 1.1
Explain Capital
Capital are physical goods which can be used in the production process e.g. Fixed: Machienes, Builidng work, Finished or semi-finished consumer goods
- Reward: Interest from the investment
Factors of Production 1.1
Explain Entrepreneurship
Entrpreneur is someone who takes risks, innovates, and uses the factors of production. Resources are drawn together into the production process e.g. Elon Musk ( owner of Tesla).
- Reward: Profit- an incentive to take risks
Factors of Production 1.1
Explain Land
Land is natural resources such as oil, coal, wheat, water. It can also be the physical space for fixed capital.
- Reward: Rent for Land
Factors of Production 1.1
Explain Labour
Labour is the human capital which is the work force of the economy
- Reward: wages
Sustainability
What is Sustainability?
Scarcity is worsened if resources are depleted. Sustainable resource use means meeting present needs without compromising future generations. For example, overfishing now creates scarcity for future consumers. Economic agents increasingly consider sustainability when making choices, to mitigate the basic problem of scarcity over time.
What is Opportunity Cost?
Every decision has the next best alternative forgone
EXAM TIP
Be prepared to define scarcity and opportunity cost clearly. A common exam question is to discuss how a production possibility curve illustrates the basic economic problem – ensure you can explain points of inefficiency, efficiency, and unattainability on the curve in terms of resource use.
