the economic problem and allocative efficiency

Question 1

what is the problem

Answer 1

people have unlimited wants but there are a limited amount of resources because resources are scarce

Question 2

what does this lead us to question

Answer 2

how can the available scarce resources satisfy peoples infinite needs and wants effectively?

Question 3

what does land include (factor of production)

Answer 3

all of the earths natural resources like non- renewable ones such as oil, renewables such as wood from trees, materials extracted from mining, water and animals

Question 4

what is a benefit of renewables

Answer 4

they can be regrown and regenerated
these do need to be used carefully so they don’t run out meaning the stock can be maintained over a period of time
e.g to be sustainable, enough trees should be planted to replace those that are used

Question 5

why is it good that fops (factor of production) are used

Answer 5

individuals and firms are rewarded for these fops through things such as wages

Question 6

draw out the circular flow model- its in folder!

Answer 6

then describe it

Question 7

what is it meant by ‘economic agents are assumed to be ration’.

Answer 7

Whatever we decide we make sure there is a rational decision behind it

Question 8

what is the incentive for an entrepreneur

Answer 8

profit

Question 9

what is the incentive when it comes to land

Answer 9

rent

Question 10

what is the incentive when it comes to capital

Answer 10

interest from the investment

Question 11

what so the incentive when it comes to labor

Answer 11

wages

Question 12

how do firms make rational decisions

Answer 12

they must first identify the problem based on feelings and instincts of the consumer
firms have criteria’s that are there to maximize profits so these may be used and then they weigh this up- they may decide keeping all their employees is most important. they then evaluate any alternatives and then make their decision they carry it out
after they’ve done this they can then see the effect this has had on the firm and see if this was the best decision or not

Question 13

what is a limitation of this

Answer 13

realistically this may not be the best way to make decisions as it takes a long time to decide things based of intuition and this might not work well for firms that have time constraints

Question 14

how do incentives aid resource allocation

Answer 14

econ agents respond to incentives in order to provide the highest utility to each agent
for the euntrepanur, the incentive is taking risks for profit but when these incentives are not given properly respouces will be missallocated

Question 15

what provides signals in the market

Answer 15

prices gives signals to buyers and sellers to purchase or sell goods which changes behaviour
e.g high demand for a high priced good will give incentive to firms to allocate more respurces to produce more goods

Question 16

what is an advantage of this

Answer 16

firms are more likely to be efficient because they are meeting the g and s that consumers are demanding . theyre also likely to lower their average cost making better usage of these scarce rescpurces meaning the overall average output of the economy decreases

Question 17

what is a disadvantage of this

Answer 17

the free market ignores equality- it tends to benefit those who hold most of the wealth meaning there could be monopiles that choose to exploit this by charging higher price

Question 18

what is allocative efficiency

Answer 18

when resources are allocated at the best interest of society where there is maximum social welfare and maximum utility