Unit 1: The basic economic problem Flashcards
Define FOP (Factors Of Production)
The 4 resources that allow an economy to produce its output; land, labour, capital, entrepreneurship
Define capital
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
Define land (FOP):
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)
Define labour:
The human factor of production. It is the physical and mental contribution of the existing workforce to production.
Define entrepreneurship
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.
Define natural resource/gift of nature
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.
Give an example of manmade resources
Capital is an example of this.
Define economic good
Goods that have an opportunity cost
Define free goods:
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.
Define free goods:
These have 0 opportunity costs. They can be consumed in endless without impacting anything.
Define opportunity cost:
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.
Define production possibility curve (PPC)
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
Define allocation of resources
Refers to how resources are distributed between competing uses.
Define allocation of resources
Refers to how resources are distributed between competing uses.
Define the basic economic problem
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.
State the 3 basic economic questions
what/how much to produce?
how to produce?
and for whom to produce?
Define private sector
Economic activity in this part of the economy is undertaken by private firms and households. Their aim is to generate profit.
Define merit goods:
Goods or services considered to be beneficial to people that would be underprovided by the market and so underconsumed.
Define a free market economy
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.
Define market failure
When the price mechanism fails to allocate resources effectively. The failure of markets to produce at a socially desirable level of output.
Define planned/command economy
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.
What are the market forces?
Demand and supply
Define the public sector
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.
What is self interest?
The motivation behind the behaviour of rational economic agents (e.g. landlords want to maximise their rental income)
Define free market economy
System in which forces of demand and supply determine the prices of products and there is no government intervention.
Define supply
The willingness and ability of producers to produce a quantity or service at any given price.
Define demand
The willingness and ability of consumers to purchase a good or service at any given price.
Write all points about free market economy:
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.
Write all points about the mixed economy
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.
Write all points about the planned economy:
Who?: Government
How?: Using govt planning
For whom?: For the general public who receive goods at subsidised prices or free of charge.
Define public goods
- 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
Define merit good
- underprovided by private firms and are underconsumed
Define a market
A place where buyers and sellers exchange resources (FOP) or goods and services at particular prices
List the resources, their respective returns, and limiting factor on returns
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
What are the characteristics of a free market?
- 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
Write more points on self - interest?
- Competition causes more competition
- Advantages of the free market system
- Disadvantages
- 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.
- 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.
How the centrally planned/command economy works
- 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.
- advantages of centrally planned/control economy
- disadvantages
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.
Define privatisation
Process through which state/government run organisations are transferred to the private sector
Define nationalisation
Process through which private enterprises are transferred to the public sector
Advantages of a mixed economy
- 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
What are economic agents?
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)
What is the difference between wages and salaries?
wages: paid hourly
salaries: fixed amount per month
Which 2 factors affect geographical mobility?
- Family ties and relations
- Cost of living
Causes of changes in the quantity or quality of factors of production
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
Define opportunity cost
The cost of the next best opportunity forgone when making a decision
Define a production possibilities curve/diagram
represents the maximum combination of goods and services which can be produced in an economy i.e. the productive capacity of the economy
What does a point outside the PPC mean?
What does a point inside the PPC mean?
- unattainable - economy does not have the resources for that
- Not all resources are being used - innefecient
What 2 factors can cause a shift in the PPC curve
- 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
