The Economic Problem

Question 1

What is economics about?

Answer 1

How to best satisfy infinite desires using limited resources

Question 2

What is the economic problem?

Answer 2

There are unlimited needs/wants, but limited resources to satisfy people’ desires

Question 3

What are the 4 factors of production?

Answer 3

Land
Labour
Capital
Enterprise

Question 4

What is land? It’s reward?

Answer 4

Natural space available for production

Includes all natural resources non-renewable + renewable resources (oil, natural gas) extraction of raw materials (diamond, gold), water + animals found in area

Reward = rent

Question 5

What is a free good?

Answer 5

A resource that is enough for everyone, almost impossible to buy e.g. air

Question 6

What is labour? It’s reward?

Answer 6

Work done by those who contribute to the production process

Quality of labour depends on education, experience + training

Reward = wage

Question 7

What is capital? It’s reward?

Answer 7

The equipment used in producing g+s

Most of economy’s capital is paid by the government

Reward = interest

Question 8

What is enterprise? It’s reward?

Answer 8

Willingness of entrepreneurs to take a risk to make a profit

Set up business with use of FOP, make loss/profit

Reward = profit

Question 9

What is economic activity?

Answer 9

Involvement of combining the FOP to create outputs that people can consume

Question 10

What is the purpose of economic activity?

Answer 10

Increase people’s economic welfare by creating g+s that satisfy their various needs+wants

Question 11

What is a good?

Answer 11

‘Physical’ products you can touch e.g. books

Question 12

What is a service?

Answer 12

‘intangible’ things e.g. medical checkups/training

Question 13

What are main 3 economic question?

Answer 13

What to produce?
How to produce it?
Who to produce it for?

Question 14

Who are the economic agents?

Answer 14

Households/consumers
Firms/producers
Government

Question 15

Who are the economic agents?

Answer 15

Households/consumers
Firms/producers
Government

Question 16

What is meant by a producer?

Answer 16

Firms or people that make/provide g+s

Question 17

What is meant by a consumer?

Answer 17

People or firms who buy the g+s

Question 18

What is the government?

Answer 18

Institutions that sets the rules that other participants in the economy have to follow
They also produce/consume g+s

Question 19

What decisions do producers make?

Answer 19

What to make + price they are willing to sell for?

Question 20

What decisions do consumers make?

Answer 20

What to buy + price they are willing to pay?

Question 21

What decisions does the government make?

Answer 21

How much to intervene in the way producers + consumers act

Question 22

Why are all the economic agents assumed to be rational in a market economy?

Answer 22

They make decisions in their self interest, due to their economic incentives e.g. producers incentive this to maximise profits