U1 AOS 1 - Lesson 4 - Basic Economic Questions Flashcards
The three basic economic questions
- What and how much to produce
- How to produce
- For whom to produce
True/False: one of the three basic economic questions is what to produce.
False: the question is what and how much to produce.
How is ‘what and how much to produce?’ answered in a market economy?
Mostly by the price mechanism - producers will produce the goods that are the most profitable, and they will produce at the equilibrium price (which maximises profit)
However, the government also intervenes to protect against market failures
How is ‘how to produce?’ answered in a market economy?
Producers determine the most cost effective and efficient way to produce - however, government also influences this through environmental and workplace regulation
How is ‘for whom to produce?’ answered in a market economy?
Those with the most money and willing to pay the most have greatest access. Those paying the least or not paying at all will have the least access
True/False:
The three basic economic questions can only be answered by market forces
False - there are other ways of answering these questions, which usually require greater government intervention
True/False:
The three basic economic questions arise due to the existance of relative scarcity
True
Relative scarcity results in decisions needing to be made on how to allocate resources → influences what is produced, how it is produced and who receives goods/services
In a market economy, it is consumers that ultimately decide what is produced.
A. Ture
B. False
C. Fasle
D. True
D (True)
Consumers demanding a product sends price signals for producers to continue to produce (or produce more of) a produce. Similarly, consumers not demanding a product will result in surpluses and falling prices, so producers will reduce their production of these unpopular goods/services.
This concept is known as consumer sovereignty.
