The Economic Problem & Need for Choice

Question 1

What is the economic problem?

Answer 1

The scarcity of resources in relation to unlimited human wants.

Question 2

What are the 3 groups in an economy?

Answer 2

The individual/household, business firm and the government.

Question 3

What is the study of economics concerned with?

Answer 3

Solving the economic problem - making choices about how to allocate limited resources to maximise individual and collective utility.

Question 4

What is meant by “utility?”

Answer 4

Satisfaction/pleasure.

Question 5

What are the types of wants?

Answer 5

1. Basic wants (needs): must be satisfied in some degree in order to survive.
2. Recurring wants: need to be satisfied at recurring intervals (e.g groceries, petrol, beauty services).
3. Substitute wants: interchangeable (butter and marmalade).
4. Luxury wants: satisfy needs in excess of basic wants (e.g designer clothing).
5. Complementary wants: derived from other wants and are complementary in use. (e.g petrol and car, cellphone and mobile data plan).
6. Individual wants: desires of each person depending on preference and income level.
7. Collective wants: demands of communities or groups of people. Are usually provided by government (e.g roads, schools, hospitals).

Question 6

How do our wants change over time?

Answer 6

Wants can change over time due to our income, age, advancements in technology and social trends.

Question 7

What are the four questions all economies need to answer in terms of resolving the economic problem?

Answer 7

1) What to produce?
2) How much to produce?
3) How to produce?
4) How to distribute production?

Question 8

What is the conflict regarding the 4th question (recall what the question was).

Answer 8

How to distribute production.
Each economy must decide if it wants a more equitable (even) distribution of production OR a more inequitable (uneven) distribution of production. This is a difficult question as there is often a conflict between equity and efficiency - more efficient systems produce less equitable solutions.

Question 9

What is meant by “opportunity cost?”

Answer 9

The potential forgone profit as a result of choosing one option over another.

Question 10

With examples, explain how opportunity cost is experienced by all 3 groups in an economy.

Answer 10

1. Individual: The individual consumer with limited resources (dependent on their income) may have to choose between a new car or a holiday for the family. If they choose the car, the real cost is the overseas travel that they have to forgo.
2. Business firm: The business firm must also make a choice in the allocation of its scarce resources. An entrepreneur who decides to produce a computer gives up the opportunity to produce something else – such as electrical appliances – with those resources.
3. The government has limited resources that it can use to satisfy community wants. If the government allocates resources to constructing a new fleet of submarines, it may be at the expense of a new motorway or airport.

Question 11

List examples of government intervention in an economy (which makes all economies mixed these days).

Answer 11

• Setting minimum wages.
• Social welfare programs (e.g Centrelink).
• Setting regulations and policies (e.g first home owner grant).