Theme 1 - Scarcity & Choices

Question 1

What is microeconomics?

Answer 1

Is the study of economic decisions taken by individual economic agents including households, firms and the government. It looks at one specific area of the economy in detail.

Question 2

What is a positive and a normative statement?

Answer 2

Positive: a statement about what is true, it is testable by facts.
Normative: a statement involving a valued judgement about what ought to be true.

Question 3

What are the assumptions about the objectives of agents?

Answer 3

Consumers: wish to maximise satisfaction or utility from consumption by correctly choosing how to spend their limited income.
Firms: wish to maximise profits by producing at lowest costs and charging the highest price.
Government: wishes to improve the economic and social welfare of citizens.

Question 4

What is the basic economic problem?

What are wants and needs, and explain opportunity cost.

Answer 4

Scarcity which is defined as a situation that arises because people have unlimited wants in the face of limited resources.
Wants: things we desire beyond and above our basic needs
Needs: essential to human survival.
Opportunity cost in decision making is the value of the next best alternative foregone.

Question 5

What are renewable resources, non-renewable resources and free goods?

Answer 5

Renewable: natural resources that can be replenished such as solar energy.
Non-renewable: natural resources that cannot be replenished such as coal.
Free good: is a good that is not scarce, and therefore an unlimited supply is available.

Question 6

What are the factors of production?

Answer 6

Capital: goods used in the supply of other products, all man-made aids to production such as a lorry.
Enterprise: is the initial idea or risk that draws together the other factors of production.
Land: land itself, plus everything produced by the earth, it is a natural resource such as trees.
Labour: all human effort used in production such as a worker.

Question 7

What is factor income?

Answer 7

Income that flow to each of the main factors of production when they are brought into productive use.
Land: rental income
Labour: wages
Enterprise: profits
Capital: interest

Question 8

Name and explain the sectors of economy!

Answer 8

Primary: raw materials are extracted from the ground
Secondary: raw materials are transformed into goods
Tertiary: the services are provided
Quaternary: services to do with information and knowledge

Question 9

What are Paul Samuelsons three questions?

Answer 9

WHAT goods and services should be produced in a society from its scarce resources?
HOW should the goods and services be produced?
FOR WHOM should the goods and resources be produced for?

Question 10

What are consumer goods?

Answer 10

Goods which are consumed or used or used up by use when we buy them - present use

Question 11

Capital goods

Answer 11

Goods manufactured for the purpose of producing other goods, they increase future capacity and are known as investments.

Question 12

How to use a PPF to show economic growth:

Answer 12

Outward shift of the PPC represents a process of potential economic growth, caused by increase in quantity of FOP or improvement in quality of FOP.

Question 13

Reasons why a PPC may shift outwards:

Answer 13

• Emigration
• early retirement age
• natural disasters
• war
• reduction in the labour force

Question 14

Explain specialisation:

Answer 14

Concentration by a worker or workers, firm or region on a narrow range of goods and services. It leads to productivity increase in the economy.

Question 15

Division on labour

Answer 15

A process whereby production is broken down into a sequence of stages, and workers are assigned to a particular stage. They may specialise in a particular aspect of production or a product, a country may also specialise.

Question 16

Productivity:

Answer 16

The output, or production of a good or per ice per input. It is a measure of the efficiency of a factor of product.

Question 17

Why specialisation increases productivity:

Answer 17

• it increases specific skills
• saves times
• highly specialised capital will increase productivity as it creates even more specialisation

Question 18

Advantages of specialisation:

Answer 18

• faster at completing tasks so it’s saves time
• less wastage
• reduces the average unit cost of production
• skill level may increase
• workers receive higher wages due to firms receiving higher profits

Question 19

Disadvantages of specialisation:

Answer 19

• boredom / monotony
• shortage of workers with the specific skills necessary
• less workers required can lead to unemployment
• lower levels of skills within workers

Question 20

Disadvantages of over-specialisation:

Answer 20

• lack of motivation from workers can decrease output in the long run
• if the market crashed for a good that a firm specialises in then they will lose business causing unemployment
• if the market crashes for a good that a country specialises in then the economy suffers.

Question 21

Explain the term ‘market’

Answer 21

A set of arrangements that allows for transactions to take place. It brings together buyers and sellers of a particular product.

Question 22

Money must have 4 functions in order to be efficient:

Answer 22

• medium of exchange: acceptable to both the buyer and seller
• a store of value: must be possible to store and use it at a later date
• a unit of account: it allows the value of goods and services to be compared
• a standard of deferred payment: if a firm or individual wants to agree a contract money must be accepted now and in the future