The basic economic problem Flashcards
economic good
a product which requires resources to produce it and therefore has an opportunity cost
free good
a product that does not require any resources to make it and so does not have an opportunity cost.
factors of production
the economic resources of land, labour, capital and enterprise C- CAPITAL E- ENTERPRISE L- LAND L- LABOUR
the basic economic problem
people have unlimited wants and needs but there are limited resources to satisfy these wants and needs, so choices have to be made on how to allocate these limited resources to satisfy as many needs and wants as possible
needs
essentials things for people to live adequately
food, water ,shelter, clothing, medical needs
wants
luxuries people desire to live more comfortably
Capital
manufactured, man-made goods used to produce other goods and services rather than being used for its own sake
e.g. machinery, tool, office
enterprise
skills a business person requires to combine and manage successfully the other three factors of production, the ability to undertake risk and decision-making
land
natural resources, obviously land for farming and the land on which buildings are built, but also resources found underground, such as coal, oil and etc.
labour
the mental or physical skills of a human which are used to produce a service or good
questions when making goods and services
What to produce?
How to produce?
For whom to produce it for?
opportunity cost
the cost of the benefit foregone by giving up the next best alternative when making a decision
Production Possibility Curve PPC
The PPC represents potential prospects for the production of a pair of products
What does a PPC show
productive capacity, maximum output of an economy given the resources and factors of production it has
What does being inside the PPC mean
all the resources are not being used to the best of their ability - inefficiency
What does being on the PPC mean
ALL the available resources are being used EFFICIENTLY
what other concept of economics does the PPC show
Opportunity cost and scarcity
different types of economies
planned economies, market economies
planned economy
- government makes decisions about what, how, for whom the goods are produced
- government main owner of most factors of productions (FoP)
- Government is the employer and sets wages and prices
- Goods produced may not match consumers’ wants
- Not many planned economies in the world (ex: North Korea)
Market economy
- a.k.a free enterprise economies
- minimum government intervention/involvement
- land & capital are privately owned
- consumers decide what is produced by paying more for the things which they want
- firms and resources produce things which are high in demand (advantgaes - efficient use of resources, more choice and makes lots of money) (disadvantages - profit maximisation aims mean that public good might not be supplied and external costs not accounted for)
No pure market economies exist as far as we know
