the economic problem Flashcards
positive statements
a statement that is factual and can be proven
normative statement
a statement that is based on opinions, a value judgement and can not be proven
the basic economic problem
- our wants are infinite
- the resources to produce these goods are finite
- this results in scarcity
factors of production
- land
- labour
- capital
- enterprise
land
- natural resources such as oil, coal, wheat, water.
- it can also be physical space for fixed capital.
labour
human capital, which is the workforce of the economy.
capital
man-made aids to production
They are used to supply other products eg. Machinery, technology, factories etc.
enterprise
organization, willingness and ability to take risks
forced choices to be made
- what to produce?
- how to produce it?
- for whom to produce?
economic goods
- benefit society
- have the problem of scarcity
- have an opportunity cost
- since they are scarce they have some value, so consumers will pay for them and they can be traded
free goods
goods that are not scarce. eg. air
and have no opportunity costs
scarcity
when wants are infinite but resources are finite.
refers to the shortage of resources in relation to the quantity of human wants
needs
resources necessary to survive
wants
goods and services people would like to consume
economic agents
- producers
- consumers
- government
incentives
something which motivates an individual to make choices and behave a certain way
rationalisation
decision making that leads to economic agents maximising their utility
maximisation
consumers aim to generate the greatest utility possible, firms aim to generate the highest profits possible
economic efficiency
when resources are allocated optimally, so every consumer benefits and waste is minimised
productive efficiency
when resources are used to give the maximum possible output at the lowest possible cost; MC=AC
allocative efficiency
when resources are allocated to the best interests of society, when there is maximum social welfare and maximum utility; P=MC
trade off
when one thing is lost to gain something else
PPF
depicts the maximum productive potential of an economy , using a combination of two goods and resources, when resources are fully and efficiently employed
government
-assumed to act on behalf of consumers
-they intervene in the economy to different extents.
for example, some might provide healthcare and education, whilst others might leave healthcare to the free market.
producers/firms
- firms aim to maximise their profits
- this is the reward entrepreneurs receive for taking risks and making investments.
- some firms have different objectives, such as maximising social welfare or helping the environment.
- some firms might have philanthropic owners who seek to maximise the utility of others.
consumers/households
- decide how to spend their limited resources.
- choose option which maximised utility.
- a consumers utility is the total satisfaction gained from consuming a good or service.
reward/incentive
capital
interest from investment
reward/incentive
enterprise
profit- an incentive to take risks
reward/incentive
land
rent
reward/incentive
labour
wages
the rational decision making model
- identify the problem
- find and identify the decision criteria
- weigh the criteria
- generate alternatives
- evaluate alternative options
- choose the best alternative
- carry out the decision
- evaluate the decision
