The Basic Economic Problem

Question 1

What is scarcity?

Answer 1

The concept that resources are limited in supply so that choices have to be made about their use.

Question 2

What is Opportunity Cost?

Answer 2

The benefit lost from the next best alternative forgone.

Question 3

What are Free Goods?

Answer 3

Goods which are unlimited in supply and therefore have no opportunity cost.

Question 4

What are economic goods?

Answer 4

Goods which are limited in supply and therefore have an opportunity cost

Question 5

The Basic Economic Problem

Answer 5

The choice that has to be made about how resource are allocated because needs and wants are unlimited whilst the resources to meet those needs and wants are limited

Question 6

Needs

Answer 6

The minimum which is neccesary for survival- food, water, warmth, clothing and shelter.

Question 7

Wants

Answer 7

Those resources we want but do not need to survive

Question 8

Factors of Production

Answer 8

The inputs to the production process- land, labour, capital (machinery) and enterprise.

Question 9

Positive Economic Statements

Answer 9

A statement of economic fact that can be tested right or wrong by the evidence.

Question 10

Normative Economic Statements

Answer 10

An economic statement that contains a value judgement about what ought to to be (an opinion)

Question 11

What does a PPF (Production Possibility Frontier) show?

Answer 11

The combinations of two or more goods and services that can be produced using all available factor resources efficiently.

Question 12

What is Productive Efficiency?

Answer 12

• Producing output at the lowest possible average cost of production
• Maximising output from the available input (all points on the line do this)

Question 13

What is Allocative Efficiency?

Answer 13

• when resources are being allocated to produce the goods and services that consumers want.

Question 14

Why is the PPF curve drawn concave?

Answer 14

As resources are transferred from one good to another the most suitable resources will be transferred first. Once the most suitable resources have been transferred the second good will require resources less suited, so it requires more resources so curves as it continues to increase.

Question 15

What would happen to the curves if there was an increase in all factor inputs?

Answer 15

A parallel shift outwards

Question 16

What would happen to a the curves if there was an improvement in technology or an increase in productivity of on good/service?

Answer 16

A skewed shift leading to an increase in the output of one good

Question 17

How can a country’s PPF shift inwards?

Answer 17

• a deep economic recession leading to: closed businesses, loss of capital, unemployed workers who leave the labour market permanently
• Over-exploitation of scarce renewable resources e.g. over-fishing
  -External shocks which destroy factor resources e.g. natural disasters and wars.

Question 18

What can cause the PPF curve to shift outwards?

Answer 18

There is an increase in the total stock of factor productions available
AN industry or economy achieves a rise in factor efficiency (productivity)
Advances in technology

Question 19

What does an outward shift on the PPF curve signify?

Answer 19

An expansion in a countries productive potential i.e. long run economic growth.

Question 20

What is the central purpose of economic activity?

Answer 20

The satisfaction of needs and wants.

Question 21

How do governments want to maximise the welfare of its citizens?

Answer 21

By maximising the return on each £ of taxpayer money

Question 22

How do customers want to maximise their welfare?

Answer 22

By maximising the return on each £ spent

Question 23

How do firms want to maximise their welfare?

Answer 23

By maximising the return on each £ invested in the business e.g. profit

Question 24

How do workers want to maximise their welfare?

Answer 24

By maximise the return on each hour of labour provided e.g. wages

Question 25

What does economics study?

Answer 25

The economic behaviour of both individuals and groups of people, and the economic relationships between individuals and groups.

Question 26

What does social science study?

Answer 26

Society and the relationships of individuals within a society.

Question 27

How is the development of economic theory is the same as natural theory?

Answer 27

They follow the same process: Oberservation-> hypothesis-> predictions-> testing->further testing or a new hypothesis-> conclusion

Question 28

Why is economics seen as a ‘softer science’ than the ‘harder’ natural science’ ?

Answer 28

Economic theory allows many exceptions- if the theory works most of the time it is considered correct. Natural theory is set in stone.