The Basic Economic problem

Question 1

What is the basic economic problem?

Answer 1

scarce economic resources compared with society’s unlimited wants.

Question 2

What are the three fundamental questions?

Answer 2

1. What to produce & what quantities? - Goods are split up into capital goods (producing other goods) & consumer goods (satisfying consumers)

2.How should these goods and services be produced?- The basic production decision is between labour intensive methods (Where a high proportion of labour is used compared to capital) and capital intensive methods (the opposite)

3. Who these goods should be allocated to? - affects the degrees of equity and equality in society. Decisions about who gets what in society will be determined by the prevailing economic system

Question 3

What are the two extreme forms of economic system?

Answer 3

-The free market or capitalist economy - Decisions are made solely by the interactions of consumers & firms with no government intervention

-The command or centrally planned economy - decisions are made solely by the planning department of governments.

Question 4

What is Opportunity Cost?

Answer 4

the cost of the next best alternative that you give up when you have to make a choice

Question 5

What is a production possibility diagram/curve (PPC)?

Answer 5

a diagram which depicts the maximum combinations of two goods in an economy, assuming full and efficient employment of resources

Question 6

What are the other names for production possibility curves?

Answer 6

production possibility frontiers (PPF’s) & Production possibility boundaries (PPB’s)

Question 7

What causes an outward shift in the ppc? (Positive)

Answer 7

-Technological improvements that lead to increased productivity of capital equipment
-Discovery of new resources , such as oil and gas
-Improvements to education & training which leads to a more productive workforce
-changes causing increase in working population

Question 8

What causes an inward shift in the ppc? (negative)

Answer 8

-Natural disasters which destroy natural resources
-wars
-Global warming/climate change - loss of farmland rising sea levels & extreme weather
-Prolonged recession, which could lead to a permanent loss of productive capacity if businesses close down/workers lose skills

Question 9

How does the PPC show opportunity cost?

Answer 9

as more capital goods are produced, more consumer goods must be given up

Question 10

How does the PPC show economic growth?

Answer 10

When the ppc shifts outwards it means there has been an increase in the productive capacity of the economy. This creates a new production point lead to increased potential output of both capital goods & consumer goods