Unit 1.1 The Economic Problem

Question 1

What is the economic problem?

Answer 1

Humans have unlimited wants and needs but limited resources.

Question 2

What is an economic good?

Answer 2

There is a limited supply. These goods are scarce.

Question 3

What is a free good?

Answer 3

This is not usually seen as limited in supply

Question 4

Give an example of a free good.

Answer 4

Air

Question 5

What are the three questions of the economic problem?

Answer 5

What should be produced?
How should it be produced?
For whom should it be produced?

Question 6

What is microeconomics the study of?

Answer 6

The study of the behaviour of individuals, firms and governments in relation to the allocation of products and/or resources.

Question 7

What is scarcity?

Answer 7

When there is a limited amount of something

Question 8

Macroeconomics

Answer 8

The study of the behaviour and performance of the economy as a whole?

Question 9

What is a positive statement?

Answer 9

A factual statement which can be tested.

Question 10

What is a normative statement?

Answer 10

An opinion based statement.

Question 11

What are economic agents?

Answer 11

Key groups involved in the economic problem- e.g. government, firms and households.

Question 12

What are the two key roles of households in the economy?

Answer 12

Consumers
Providing labour or a workforce.

Question 13

What are the two key roles of firms in the economy?

Answer 13

Producers of goods and services.
Purchasers of goods and services in the production process.

Question 14

What is the role of the Government in the economy?

Answer 14

Taxation
Spending
Social Welfare
BUT the role of the government depends on the political party

Question 15

What is rationality?

Answer 15

The assumption each economic agent (firms, households and governments) act in their own best interests:
Households maximise utility
Firms maximise profit
Governments maximise welfare.

Question 16

What are the factors of production?

Answer 16

Land, labour, capital and enterprise.

Question 17

What do the factors of production do?

Answer 17

They are the building blocks to produce goods and services.

Question 18

What is a the reward of a factor of production?

Answer 18

The return for the use of a factor of production (by firms)

Question 19

What is the reward for land?

Answer 19

Rent

Question 20

What is the reward for labour?

Answer 20

Wages and salaries

Question 21

What do economists mean by land?

Answer 21

The area of the earth’s surface and the raw materials within it e.g. soil, coal, fish.

Question 22

What is the reward for capital?

Answer 22

Interest

Question 23

What is the reward for enterprise?

Answer 23

Profit

Question 24

What do economists mean by labour?

Answer 24

The mental and physical effort of people

Question 25

What do economists mean by capital?

Answer 25

Buildings, machinery, vehicles and money

Firms often borrow money to invest in new capital. This means buy a machine, IT system or anything man made which will help with production.

Question 26

What do economists mean by enterprise?

Answer 26

The entrepreneur who takes a risk and organised the other factors of production.

Some economists see entrepreneurs as another form of labour.

Question 27

Try writing this out

Exam question: Explain the concept of rationality (4)

Answer 27

Rationality in economics is the main assumption made about the key agents in economic systems. Firstly, it assumes agents seek to maximise one goal in line with their preferences. For consumers this is utility, for firms it is profit and for governments it is the level of welfare in society. Rational behaviour is based on the assumption of access to perfect information and the agent is able to weigh up all the options before making the decision. It assumes agents are not influenced by emotions, morals or psychology and form decisions using logic.