The Economic Problem Flashcards
Barter
The practice of exchanging one good or service for another without using money.
Fundamental economic problem
There are infinite wants but finite factor resources with which to satisfy them.
Constraints
Limits to what we can afford to consume – we have to operate within a budget and therefore must make choices from those sets that are feasible/affordable. There is always a set of conceivable things that are actually available, and another set of that are not.
Economic agent
A participant in an economic system – be it a consumer, business or the government.
Entrepreneur
An entrepreneur is an individual who seeks to supply products to a market for a rate of return (i.e. a profit). Entrepreneurs will often invest their own financial capital in a business and take on the risks associated with a business investment.
Factor incomes
Factor incomes are the rewards to factors of production. Labour receives wages and salaries, land earns rent, capital earns interest and enterprise earns profit.
What are the 4 factors of production?
Capital, Enterprise, Land and Labour (CELL)
FoP 1. Capital
Capital - goods used in the supply of other products e.g. technology, factories and specialized machinery.
FoP 2. Enterprise
Enterprise - Entrepreneurs organise factors of production and take risks.
FoP 3. Land
Land - Natural resources available for production.
FoP 4. Labour
Labour - The human input into the production process.
Finite resources
There are only a finite number of workers, machines, acres of land and reserves of oil and other natural resources on the earth. By producing more for an everincreasing
Free goods
Free goods do not use up any factor inputs when supplied. Free goods have a zero-opportunity cost i.e. the marginal cost of supplying an extra unit of a free good is zero.
Inputs
Labour, capital and other resources used in the production of goods and services.
Interest
Interest is the reward to the ownership of capital.
Manufacturing
The use of machines, tools and labour to make things for use or sale. The is most commonly applied to industrial production, in which raw materials are transformed into finished goods on a large scale.
Needs
Humans have many different types of wants and needs - economic, social and psychological. A need is essential for survival; food satisfies hungry people. A want is something desirable but not essential to survival e.g. cola quenches thirst.
Non-renewable resources
Non-renewable resources are resources which are finite and cannot be replaced. Minerals, fossil fuels and so on are all non-renewable resources.
Opportunity Cost
The cost of any choice in terms of the next best alternative foregone.
Rationing
Rationing is a way of allocating scarce goods and services when market demand exceeds available supply. There are many ways of rationing including by price, by consumer income, by assessment of need, by education level and by age, gender, nationality
Renewable resources
Renewable resources (in theory) are replaceable if the rate of extraction of the resource is less than the natural rate at which the resource renews. Examples of renewable resources are solar energy, oxygen, biomass, fish stocks and forestry.
Rent
Rent is income typically associated with the ownership of land, but which can also include rental income from leasing out other assets such as cars, capital equipment.
Scarcity
Scarce means limited. There is only a limited amount of resources available to produce the unlimited amount of goods and services we desire.
