The Economic problem

Question 1

What is meant by the economic problem?

Answer 1

Our natural resources are depleting there isn’t enough to satisfy our wants and needs. Therefore, choices must be made.

Question 2

What is the meaning of Scarcity?

Answer 2

Resources on earth are depleting whereas the demand for these resources is infinite

Question 3

What are non-renewable resources?

Answer 3

Resources that won’t be replaced after being used. E.g

• Oil
• Iron
• Coal

Question 4

What are renewable resources?

Answer 4

Resources that can be replenished after being used. E.g

• Solar Energy
• Wind Energy

Question 5

Economic Goods

Answer 5

Goods created from non-renewable resources, meaning they need a higher price.

Question 6

Free Goods

Answer 6

Goods that are in unlimited supply, therefore meaning that the opportunity cost is zero

Question 7

What is opportunity cost?

Answer 7

the loss of other alternatives when one alternative is chosen

E.g if you spend £10 billion on funding the NHS, you won’t be able to spend £10 billion on funding public transport.

Question 8

Example of opportunity cost for a consumer

Answer 8

A consumer may have enough money to buy one of two items such as either a sandwich or packet of crisps, if they buy the sandwich, the opportunity cost is not buying the crisps

Question 9

Example of opportunity cost for a company

Answer 9

If a company chooses to upgrade the IT system rather than building a new factory, the opportunity cost is the new factory as production can consequently be lower.

Question 10

What is a production possibility frontier (PPF)?

Answer 10

A graph that shows the maximum potential output of an economy when all resources are fully employed. See graph in notes

Question 11

What are capital goods?

Answer 11

Goods sold between businesses to make different goods. Such as steel for making a chair frame or machinery

Question 12

What are consumer goods

Answer 12

Goods sold to customers that have a use or give satisfaction, such as a car or an expensive belt

Question 13

When constructing a PPF what do you need to assume?

Answer 13

That the economy can produce both consumer and capital goods

Question 14

Why can the curve in a PPF graph not be overtaken?

Answer 14

We have a limited amount of resources and labour so you can’t go beyond maximising efficiency.

Question 15

Why is the PPF curved concave and not straight?

Answer 15

The law of diminishing returns

Question 16

What is the law of diminishing returns

Answer 16

The law states that if we add more unites of one variable factor to the fixed amount of another factor, the total output will first rise and then fall

Question 17

Give an example of the law of diminishing returns put into practice

Answer 17

If you keep on adding chefs into a kitchen with a fixed size they will eventually obstruct each others work slowing down production

Question 18

What does it mean when the PPF curve shifts outwards?

Answer 18

It means there has been economic growth

Question 19

What is meant by economic growth?

Answer 19

The economy has grown in size, I.e it has more resources at its disposal meaning the economy is able to produce more.

Question 20

When does economic growth occur?

Answer 20

When there is an increase in quantity or quality of an economy’s factors of production.

Question 21

What are the factors of production?

Answer 21

Land, Labour, Capital, Enterprise.

Question 22

Give an example of economic growth

Answer 22

Capital - GDP per capita increases
Labour- workers are putting more hours into their work and working more efficiently
Land- technical advancements in machinery meaning efficiency increases

Question 23

What happens if your produce more of one good than the other? (PPF)

Answer 23

The production rate of the other good will decrease and there will be less of that good because more supplies are being used to produce the other good

Question 24

How can the PPF curve also shift inwards?

Answer 24

If the quality or quantity of factors of production decreases. Such as natural disasters and wars, recession, fewer supplies can be bought