Unit 1: The basic economic problem

Question 1

Define FOP (Factors Of Production)

Answer 1

The 4 resources that allow an economy to produce its output; land, labour, capital, entrepreneurship

Question 2

Define capital

Answer 2

The factor of production that comes from investment in physical capital and human capital. Physical capital is the stock of manufactured resources (e.g. factories, roads, tools) and human capital is the value of the workforce (improved through education or better healthcare). Capital is a man-made resource

Question 3

Define land (FOP):

Answer 3

The physical factor of production. It consists of natural resources, some of which are renewable (e.g, wheat) and some which are non-renewable (e.g. iron ore)

Question 4

Define labour:

Answer 4

The human factor of production. It is the physical and mental contribution of the existing workforce to production.

Question 5

Define entrepreneurship

Answer 5

The factor of production which involves organising and risk-taking. The entrepreneur combines the other factors of production to produce goods and services with the aim of generating profit.

Question 6

Define natural resource/gift of nature

Answer 6

Land is an example of this. Includes all natural resources; land and agricultural land, as well as everything that is under or above this land such as minerals, oil reserves, underground water, forests, rivers and lakes.

Question 7

Give an example of manmade resources

Answer 7

Capital is an example of this.

Question 8

Define economic good

Answer 8

Goods that have an opportunity cost

Question 9

Define free goods:

Answer 9

These have 0 opportunity costs. They can be consumed in endless without impacting anything. The few things such as air, salt, and water, they are not limited in supply (relatively scarce) and so do not have an opportunity cost.

Question 9

Define free goods:

Answer 9

These have 0 opportunity costs. They can be consumed in endless without impacting anything.

Question 10

Define opportunity cost:

Answer 10

This is the benefit that is lost (or cost forgone) in making a choice between 2 competing uses for scarce resources. It is the next bext alternative use for those resources.

Question 11

Define production possibility curve (PPC)

Answer 11

A diagram demonstrating the possible combinations of the maximum output an economy can produce using all of its resources (factors of production). Capital goods = y axis. Consumer goods = x axis

Question 12

Define allocation of resources

Answer 12

Refers to how resources are distributed between competing uses.

Question 12

Define allocation of resources

Answer 12

Refers to how resources are distributed between competing uses.

Question 13

Define the basic economic problem

Answer 13

The fundamental economic problem is that there is a scarcity of resources to fulfill all human wants with. There are finite resources and unlimited human wants. This is applicable to consumers, producers, workers and the government, in how they manage their resources.

Question 14

State the 3 basic economic questions

Answer 14

what/how much to produce?
how to produce?
and for whom to produce?

Question 15

Define private sector

Answer 15

Economic activity in this part of the economy is undertaken by private firms and households. Their aim is to generate profit.

Question 16

Define merit goods:

Answer 16

Goods or services considered to be beneficial to people that would be underprovided by the market and so underconsumed.

Question 17

Define a free market economy

Answer 17

An economy where the means of production are privately held by individuals and firms. Demand and supply (market forces) determine what/how much to produce, how to produce, and for whom to produce.

Question 18

Define market failure

Answer 18

When the price mechanism fails to allocate resources effectively. The failure of markets to produce at a socially desirable level of output.

Question 19

Define planned/command economy

Answer 19

An economy where the means of production are collectively owned (except labour). The state decides what to produce, how much to produce, how to produce, and for whom to produce.

Question 20

What are the market forces?

Answer 20

Demand and supply

Question 21

Define the public sector

Answer 21

Refers to economic activity directly involving the government, such as the provision of state education and healthcare services. The public sectors main aim is to provide services or goods for the community.

Question 22

What is self interest?

Answer 22

The motivation behind the behaviour of rational economic agents (e.g. landlords want to maximise their rental income)

Question 23

Define free market economy

Answer 23

System in which forces of demand and supply determine the prices of products and there is no government intervention.

Question 24

Define supply

Answer 24

The willingness and ability of producers to produce a quantity or service at any given price.

Question 25

Define demand

Answer 25

The willingness and ability of consumers to purchase a good or service at any given price.

Question 26

Write all points about free market economy:

Answer 26

Who?: Private sector firms and households.

How?: Using the price mechanism

For whom? For those who are willing and able to purchase goods at particular prices.

Question 27

Write all points about the mixed economy

Answer 27

who? Private sector firms and households and the government

How?: Using the price mechanism and govt planning

For whom?: For those who are willing and able to purchase goods at particular prices and for the general public who receive goods at subsidised prices or free of charge.

Question 28

Write all points about the planned economy:

Answer 28

Who?: Government

How?: Using govt planning

For whom?: For the general public who receive goods at subsidised prices or free of charge.

Question 29

Define public goods

Answer 29

• produced by govt
• not provided by private firms cuz no ones willing to pay for them
• this is coz if one person paid for this good pthers could benefit from it too free of charge

Question 30

Define merit good

Answer 30

• underprovided by private firms and are underconsumed

Question 31

Define a market

Answer 31

A place where buyers and sellers exchange resources (FOP) or goods and services at particular prices

Question 32

List the resources, their respective returns, and limiting factor on returns

Answer 32

Land - Rent
Limiting factor: Supply and demand

Labour - Wages
Limiting factor: Supply and demand, legislation

Capital - Interest
Limiting factor: Industry rates/ government mandated rates

Enterprise - Profit
Limiting factor: Skill of entreprenuer

Question 33

What are the characteristics of a free market?

Answer 33

• all resources are privately owned by firms or households
• Businesses aim to maximise profits by maximising peoples wants.
• Goods and services are produced only for thise with enough money to purchase them

Question 34

Write more points on self - interest?

Answer 34

1. Competition causes more competition

Question 35

1. Advantages of the free market system
2. Disadvantages

Answer 35

1. Economic efficiency - it responds quickly to peoples wants

Firms produce only what consumers want, they will be willing to pay at a higher rate.

It relies on consumers and productores to decide what, how, and for whom to allow.

Economic freedom - freedom of workers to work wherever they want, firms to chose people

Economic growth: Competition incourages innovation

Variety and choice: Free markets offer a wide variety of goods and services.

2. Some goods will not displayed by firms because they don’t make a profit.

Factors of production will only be employed if it is profitable.

Harmful but profitable goods may be produced and consumed,

The social effects of production (e.g. pollution)

The gap between the rich and the poor wilo be evident.

Question 36

How the centrally planned/command economy works

Answer 36

• public ownership of property
  FOPs are owned by govt
• prices
  prices are fixed by govt, they don’t change even if supply and demand change
• profits
  Organisations do not produce for profit; they produce what the govt thinks is in the best interest of the people
• production is planned
  The govt sets production targets, FOPs are directed towards industries based on how much the government plans to produce in those industries.

Central govt plans:
- what to produce
- how to produce
- for whom to produce
Govt collects info on markets, then tells firms what products they have to produce and gives them th raw materials to do so.

Question 37

1. advantages of centrally planned/control economy
2. disadvantages

Answer 37

1.
Equality: Narrow gap between the rich and the poor ( govt may plan to make certain goods more accessible, may want things to be shared so they wont allow people to purchase more than a certain set quota )

Social costs are considered.
Government may try and minimise negative social costs.

Central planning can be used to encourage production and make sure people have jobs and income.

2.
Limited choices and access to desired goods. (only what govt thinks people need, NOT what the people think they need)

Poor quality goods, shortages, and gluts. Lack of competition = shortage or glut(too much) = inefficient production.

Little incentive to work hard. Income not related to productivity. govt owns all FOP.

Slow reaction to change. Since there are no entrepreneurs or competition these systems aren’t as responsive.

Question 38

Define privatisation

Answer 38

Process through which state/government run organisations are transferred to the private sector

Question 39

Define nationalisation

Answer 39

Process through which private enterprises are transferred to the public sector

Question 40

Advantages of a mixed economy

Answer 40

• a market economy may have periods of unemployment as it may not be profitable at certain times to employ staff whereas in a mixed economy the govt can create jobs for those that are unemployed
• Govt provides public goods and services by taxing peoples incomes and spending.
• govt provides g/s that they think people should consume (e.g. merit goods such as education)
• govt creates laws to prevent harmful g/s from being consumed or may attach high taxes to them to discourage consumption
• govt creates laws to protect society/the environment
• govt will provide for the poorest people

Question 41

What are economic agents?

Answer 41

An actor in a model of some aspect of the economy. these are households (private individuals in society) , firms that operate in the private sector of the economy, and the government (public sector)

Question 42

What is the difference between wages and salaries?

Answer 42

wages: paid hourly
salaries: fixed amount per month

Question 43

Which 2 factors affect geographical mobility?

Answer 43

• Family ties and relations
• Cost of living

Question 44

Causes of changes in the quantity or quality of factors of production

Answer 44

these will only change if there is a change in the demand/supply curve for land, capital, labour, enterprise

• Changes in the cost of factors of production (e.g. minimum wage is set)
• Govt policies
  - Subsidies
  - Taxes
• New technologies allow firms to produce more output.
• New migration of labour will increase quantity of labour.
• Improvements in education and healthcare will improve quality of labour
• Unfavourable weather conditions will reduce supply of agricultural products

Question 45

Define opportunity cost

Answer 45

The cost of the next best opportunity forgone when making a decision

Question 46

Define a production possibilities curve/diagram

Answer 46

represents the maximum combination of goods and services which can be produced in an economy i.e. the productive capacity of the economy

Question 47

What does a point outside the PPC mean?

What does a point inside the PPC mean?

Answer 47

1. unattainable - economy does not have the resources for that
2. Not all resources are being used - innefecient

Question 48

What 2 factors can cause a shift in the PPC curve

Answer 48

• Increase in quality of factors of production
  - e.g. more skilled labour (improved education)
  - Technological advances = improve
  production methods = more productive
• Increase in quantity of factors of production
  - Discovery of new resources
  - Reclaiming land
  - Net migration into country