The basic economic problem Flashcards

Question

Increasing opportunity costs

Answer 1

As industries or producers specialise more and more into one product, the opportunity costs of producing that product increase, because we are using more and more resources that are poorly suited to produce it.

Answer 2

The law of increasing opportunity cost holds that as an economy moves along its production possibilities curve in the direction of producing more of a particular good, the opportunity cost of additional units of that good will increase.

Answer 3

A theory in economics that predicts that after some optimal level of capacity is reached, adding an additional factor of production will actually result in smaller increases in output.

Answer 4

Conditions changing may affect one product but not the other. This is known as asymmetric change.

Answer 5

Point A on the Production Possibilities Curve (PPC) is unobtainable because it lies outside both PPC1 and PPC2. This curves indicate the maximum productive capacity of the economy. As Point A lies beyond these curves it indicates that the economy lacks the necessary factors of production (land, labour, capital or enterprise) to produce at that combination of apples and oranges. The shift from PPC1 to PPC2 represents a decrease in the economy's production capacity, however, specifically a reduction in the production of oranges. One possible reason for this asymmetric shift could be a specific factor that negatively impacts the production of oranges but not apples. Such as disease that specifically targets orange trees lowering the yield of oranges. This reduce yield of oranges thereby shifting the curve inward for oranges without affecting apple production.

Answer 6

The problem of how to make the best use of limited (scarce) resources, whilst the needs and wants of people are unlimited. This leads to scarcity. Scarcity means that we need to make choices.

Answer 7

As resources are scarce, relative to our wants. Given the finite nature of resources decisions must be made.

Answer 8

Choices have to be made: as to what will be produced, what methods are best used in the production process, and, who should be the recipients of the goods and services produced.

Answer 9

Is the idea that consumers hold the power to influence production decisions, based on what goods and services they purchase

Answer 10

Efficiency addresses the question of how well the economy's resources are used and allocated.

Answer 11

Equity deals with how society's goods and rewards are, and should be, distributed among its different members, and how the associated costs should be apportioned.

Answer 12

What to produce How to produce it For whom to produce

Answer 13

An economic system is a structure that a society puts in place in order to respond to the economic problem.

Answer 14

Despite this different societies use different methods to try and best solve this problem.

Answer 15

Traditional - (also known as subsistence economies) Planned - (also known as command or socialist economies) Market - (also known as capitalist or free-enterprise economies)

Answer 16

Total production is generally directed towards the satisfying of essential wants such as food, clothing and shelter, or the replacement of tools or weapons. They rely on the barter system to exchange goods.

Answer 17

The Planned economy is characterised by Central Planning, with all resources of land, labour, capital and enterprise owned and controlled by the state.

Answer 18

The central body is responsible for all important economic decisions within the system: Resource allocation, the nature and quantity of production The production techniques The distribution of total output.

Answer 19

The major problem with the command economic system is that it lacks incentive as everyone is considered equal. This leads to a lack of efficiency and innovation.

Answer 20

Market forces and consumer sovereignty drive the economy and answer the three questions in the most efficient manner.

Answer 21

Three main types of economic systems - Total production is generally directed towards the satisfying of essential wants such as food, clothing and shelter, or the replacement of tools or weapons. Command and Control - The Planned economy is characterised by Central Planning, with all resources of land, labour, capital and enterprise owned and controlled by the state. Market Economy - Market forces and consumer sovereignty drive the economy and answer the 3 questions in the most efficient manner.

Answer 22

The mixed economic system is defined as an economic system that combines the elements of a market economy and the elements of a planned economy. For example, Australia is a mixed economy. We are predominately a market economic system, but we have aspect of the command system in place as well as the traditional.

Answer 23

Government intervention: action by the government that affects economic activity, resource allocation and normal market operations to help achieve economic goals. E.g. provision of subsidies, change of the tax rate, changes in government expenditure, regulation of foreign investment

Answer 24

Important economic questions are decided by interactions between individual buyers and sellers in the marketplace. Each individual makes their own purchasing decisions.

Answer 25

Relies on both markets and governments to allocate resources. The government should restrict the market on moral grounds, but otherwise individuals make their own decisions.

Answer 26

Decisions about what to produce and the way the proceeds should be distributed among members of the society are made by a central planning authority.

Answer 27

An economic system based on government ownership of key resources deemed critical to the operation of the economy. Allows individuals to decide on specific items they want to buy (limited freedom).

Answer 28

An economy in which individuals produce commodities primarily for their own use and not for exchange through the market.