The Basic Economic Problem

Question 1

What are resources and what are they used for used for? (*2)

Answer 1

They are factors that are used to make goods and services.

1. used to make goods
2. used to provide services

Question 2

What is production?(*3)

Answer 2

1. Production involves the use of resources to to make sell and sell different goods and services
2. Resources such as natural materials, land, machinery and workers are the inputs
3. goods and services are the outputs

Question 3

Who is a producer?

Answer 3

The people and organisations which make and sell goods and services are known as producers.

Question 4

What is a need?

Answer 4

A need is a basic necessity that needed for survival.

Question 5

What is a want?

Answer 5

A want is something that is desired by an individual that isn’t necessarily needed by an individual for survival. It is simply something a person would like to have.

Question 6

What is the relation between wants and resources?

Answer 6

Resources are scarce compared to our unlimited wants for the goods and services.

Question 7

What is a free good?(*2)

Answer 7

1. Free goods are items we may need or want that are without limit.
2. We can use it without reducing the the quantity available for the others
3. a product which does not require any resources to make it and so it does have an opportunity cost.
4. Eg: Air, Natural light, new dance moves, yoga,

Question 8

What are economic goods?(*2)

Answer 8

1. Economics goods are items that we may need that are limited in supply.
2. Using these goods will reduce the quantity of resources available for the others
3. They are goods that takes resources to produce them and so they are limited in supply and results in an opportunity cost.
4. Eg: Cars, computers.

Question 9

What is consumption?(*2)

Answer 9

1. We consume goods and services in order to satisfy the human need or want
2. Consumption therefore involves the using up of goods and services to satisfy the human needs and wants.

Question 10

What is a consumer expenditure?

Answer 10

The total amount consumers spend each period on economic goods is called the consumer expenditure.

Question 11

What is exchange?

Answer 11

Exchange is wherein consumers engage in trade with the producers to obtain those economic goods they cannot produce themselves.

Question 12

What is a consumer good?
What are consumer services?
Explain the different types of consumer goods?(*4)

Answer 12

1. A consumer good is an economic good that satisfies an immediate consumer want or need.
2. A consumer service is a service that satisfies a consumer want or need.
3. Consumer Durables: these are a type of consumer goods that last a long time. Eg: Cars, TV
4. Consumer Non-durables: these are the goods that perishable or used up quickly. Eg: Food, Drinks

Question 13

What is a capital good?(*2)

Answer 13

1. They are goods that do not satisfy an immediate consumer want or need.
2. They are man-made resources used in the production of other goods and services.
3. Eg: Screwdrivers, Drills

Question 14

Explain the Basic Economic Problem?(*4)

Why does it occur?

Answer 14

1. Unlimited wants exceeding the finite resources.
2. `Resources are finite or are in limited in supply
3. They are used up in the production of goods and services.
4. But human wants for goods and services are without a limit therefore we must choose what to produce and consume.
5. The scarcity of resources relative to human wants is the central economic problem. This means we must make choices about how we use our limited resources
6. The basic economic problem of not being able to satisfy everyone’s wants arises because of scarcity.

Question 15

What are factors of production?(*1)

Plain the 4 types of factors of production?(*4)

Answer 15

1.The scarce resources we use up in the production of goods and services to satisfy human wants and needs are known as Factors of Production.
Another term for factors of production is economic resources. they are economic resources of land, labour, capital and enterprise.

2. Land: All natural resources. Gifts of nature available for production. Eg: Seas, minerals,
3. Labour: People who provide physical and mental effort. People who work with their hands and use their brains to produce economic goods and services provide Human Resources or Labour.
4. Capital: All the human-made resources used to produce other goods and services, are known as capital.
5. Enterprise: Enterprise is the willingness and the ability to bear uncertain risks and to make decisions in a business. the ability to organise production in a firm is known as enterprise. The people having enterpriser able to control and manage firms are called entrepreneurs.

Question 16

Who are entrepreneurs?

Answer 16

1. Entrepreneurs brings together other factors of production to make goods and services. Often they are innovative(commercial application of inventions) in nature. the reward for them is the profit but it can be negative in. a few cases.
2. Entrepreneurs are the people who organise the other factors of production and who crucially bear the risk of losing their money if the business fails.
3. The people who have enterprise and ‘business-know-how’ and are able to control and manage firms are called entrepreneurs. They have unique qualities such as organisation skills, innovator( the one who uses inventions to make products), and is also a risk-taker as he/she invest a lot of money.

Question 17

What are Factor Rewards?(*1)

What are the rewards for the factors of production?(*4)

Answer 17

1. Factor rewards are therefore the payments different factors of production require in order to participate in productive activity.
2. Land: RENT, owners of land require the payment of rent to supply these resources to firms.
3. Labour: WAGES, People will supply their Labou rot firms in return for payments called wages.
4. Capital: INTEREST, the money invested or ‘employed’ in capital goods by firms is therefore also called capital. Interest is paid to people and organisations that supply or invest capital in firms.
5. Enterprise: PROFIT, The surplus is the profit. It is the only factor of production that can receive a negative reward ( loss )

Question 18

What is factor mobility?
Types of Factor mobility?
Where does factor mobility happen?

Answer 18

1. Factor mobility refers to the ease with which resources or the factors of production can be moved from one productive activity to another without incurring significant costs or a loss of output.

• 1. Occupational mobility: refers to the ability to move factors between different productive tasks.
• 2. Geographic mobility: refers to the ability to move factors of production to different locations.
• 1. Within a firm: an employee is moved form the HR to the Finance department
• 2. Between firms in the same industry: If paint company ‘X’ shuts down then the machinery will be shifted to the paint company ‘Y’
• 3. Between industries: An employee leaves a car manufacturing company and works in a textile industry.
• 4b between different countries: A banking head manager is transferred from India to Singapore.

Question 19

Explain the two types to immobility?

Answer 19

1. Occupational immobility: this means they cannot change jobs very easily because they have a specific skill-set
2. Geographical immobility: this means they cannot change the geographical position easily due to various reasons because of family ties, home expenses

Question 20

What is opportunity cost?

Answer 20

It is the benefit from the next best alternative forgone.m The opportunity cost is the benefit we could have enjoyed from the next best alternative we choose to go without.

Opportunity cost is the cost of a decision in terms of the best alternative given up to achieve it.

Question 21

What is a Production Possibility Curve (PPC)?(*2)

Answer 21

1. A production possibility curve also known as the PP frontier or a PP boundary that shows the maximum output of two types of products, and the combinations of those products that can be produced with the existing quantity and the quality of resources and technology.
2. A Production Possibility Curve shows the various combinations of two goods that can be produced with a given amount of resources.
3. (ALTERNATIVE)A PPC of a firm shows the maximum possible output combinations of two goods or services that it can produce with the given set of inputs consisting of natural resources and other factors of production.
4. It is a graphical representation of Opportunity Cost

Question 22

Explain what the 3 different types of Points on the Production Possibility Curve show?(*3)

Answer 22

1. On the curve: It shows that the economy is productively efficient, there is no wastage of resources, there is maximum output with the available input.
2. (ALTERNATIVE)Shows that the economy is efficiently using its resources in order to produce goods and services, no factor of production is unemployed.
3. Below the curve: the Shows that there are a few unemployed factors of production or the employed factors of production are used inefficiently.
4. Above the curve: This is a point of efficiency that is unattainable with the available factors of Production. A point where an economy would aim to be.

Question 23

What is an economy?(*2)

Answer 23

1. People and firms produce, exchange and consume goods and services in an economy
2. Therefore an economy is any area in which the economic activities of production, exchange and consumption takes place.

Question 24

How is the size of an economy measured?

Answer 24

The size of a national economy is measured by the amount or value of all the goods and services it produces each week, month or year.

Question 25

What does a movement along the Production Possibility Curve show?

Answer 25

1. It shows the reallocation of resources from the production of good/service ‘X’ to the production of good/service ‘Y’.
2. for this to happen the resources should be mobile
3. By a movement along the PPC the opportunity cost of the reallocations can also be seen.

Question 26

What does an outward shift of the Production Possibility Curve show?(1)
What factors will cause an outward shift of the Production Possibility Curve?(7)

Answer 26

1.An outward shift in the PPC shows that the economy has the capacity to produce more goods each period than it did before there was an increase in the quantity or quality of its resources.

1. More natural resources are discovered
2. The supply of labour increases due to inward migration or natural population growth
3. The stock of capital equipment is increased
4. New technologies result in advanced equipment
5. Education and training of the workers and employees increasing the skills of the workers
6. Better healthcare facilities that reduce the sick leave
7. Better/ development of modern business infrastructure such as roads, telecommunications et cetera.

Question 27

What does an inward shift of the Production Possibility Curve show(1)
What factors will cause an inward shift of the Production Possibility curve?(4)

Answer 27

1. An inward shift in the PPC shows that the economy suffered as decrease in the quantity or quality of its resources. This is a Negative Economic Growth
2. Non-renewable resources are depleted
3. A fall in the supply of labour due to outward migration or a declining population
4. Capital equipment wears out and is not replaced
5. an ageing and not up-to-date technology/ infrastructure that ultimately decreases the efficiency.

Question 28

What is meant by depreciation?

Answer 28

Depreciation refers to the wear and tear/ economic reduction of value of capital goods.

Question 29

What is scarcity?

Answer 29

Scarcity is a situation where there is not enough resources to satisfy everyone’s wants.

Question 30

How can an entrepreneur reduce the responsibility and the risk taken by him?

Answer 30

1. The risk of losing the money can be divided and burdened over to other [people as shareholders and investors.
2. on the other hand the managing director can take production decisions and can organise the factors of production.
3. Some risks of loss can be insured against by getting an insurance on loss due to fire, flood or theft.

Question 31

Discuss the mobility and the immobility of land.

Answer 31

1. occupationally mobile: Land is normally occupationally mobile as the same pice of land can be used for agriculture or setting up a factory or the same water can be processed and used to drink or can be used as a coolant in an industry.
2. Land is normally considered to be geographically immobile as it is normally difficult and expensive to transport natural resources.

Question 32

Discuss the mobility and the immobility of labour.

Answer 32

1. Occupationally immobile: This normally occurs in formal working as and occurs normally due to the lack of skill set required as an engineer cannot easily become a doctor.
2. Geographically immobile: This is the normally the case due to family bonds, lack of information, living cost etc.

Question 33

What results in the labour to be geographically immobile?(*5)

Answer 33

1. Differences in the cost of living: If a person living in Pune loses a job he/she cannot find a job in Mumbai as it has a high cost of living and the person has less money.
2. Family Ties: Because people might not want to leave their friends and family.
3. Differences in the educational system: People may reluctant to shift to a new place if it interrupts the education of their children.
4. Lack of information: A person working in a village with a skill set might not know that such a skill set is highly needed and paid in the cities.
5. Restrictions on the movement of workers: there is only a limited number of work visas available.

Question 34

Discuss the mobility and the immobility of capital.

Answer 34

Geographical: this is possible for a few example a photocopier machine could be used in a bank or in a printer shop. But a few cannot be mobile for example a factory building cannot be shifted from one location to the other.

Occupational: a delivery van can be used as a food truck, ice-cream van or a mail van. But a few capital resources are immobile in terms of their occupation for example knitting machine used to knit only cotton cannot be used for something else.

Question 35

Discuss the mobility and the immobility of enterprise.

Answer 35

Enterprise is the most mobile factor of production both occupationally and geographically. an entrepreneur who took risk in the textile industry and succeeded can also bear the risk in the pencil industry and succeed. Also a person who successfully ran a textile industry in India is also likely to have successful one in China.

Question 36

Discuss the quantity and the quality of land:

Answer 36

Quantity: the quantity of land in the world today id generally reducing due to the extensive use of non-renewable resources.

Quality: this can be increase due to the technological advancements for example with the use fertilisers, refining processes.

Question 37

Explain the effect of opportunity cost on:
consumers
workers
producers
government

Answer 37

1. Consumers: A consumer has limited money but has unlimited wants. If a consumer has the limited money to buy a 10 day International trip or a car the consumer will look at the advantages and the disadvantages of each. If the consumer choses to opt for the car then the benefit that could have been enjoyed from the international trip becomes the opportunity cost.
2. Workers: As a student graduates from a university with a major and interest in both Business management and Fashion designing then the student has to make an initial choice between the field he wants to enter. if the student choses Business management then the benefit that could have been enjoyed from fashion designing is the opportunity cost.
3. Producers: If a farmer on a field has limited land then he has a to make a decision based in what is he supposed to grow on the land. If he has an option between wheat and rice and if the farmer choses to grow rice then the opportunity cost is the benefit that the farmer could have enjoyed if he would have grown wheat on the field.
4. Government: Once the government receives the tax from its citizens then the government must involve in a choice whether to spend the tax on the development of schools or hospitals. If the government plans to spend the money on schools then the opportunity cost would be the benefit that could have been enjoyed if the same money was spend on the development of schools