Unit 2: A Closer Look At The Economic Problem Of Scarcity

Question 1

What are the 3 central economic questions?

Answer 1

What
How
For whom

Question 2

What are the 10 types of goods?

Answer 2

1. Consumer good - used and consumed by individuals or households
2. Capital good - are not used by consumes but are used in the production of goods
3. Final good - are goods that are used and consumed by individuals, household and firms. E.g loaf or breads
4. Intermediate good - are goods purchased to be used as inputs in producing other goods E.g flour for bread
5. Private good - the distinguishing feature of a private good is that consumption by others can be excluded
6. Public good - is a good that is used by the community. Consumption by individuals cannot be excluded. E.g a traffic light.
7. Economic good - is a good that is produced at a cost from scarce resources. Most good are economic
8. Free good - is a good that is not scarce and the fore has no price. E.g sunshine
9. Homogeneous good - are goods that are exactly alike a fine ounce of gold is an example
10. Heterogeneous good - are goods that are available in different varieties, qualities or brands

Question 3

What are natural resources

Answer 3

Consists of gifts from of nature some examples are water, natural forests, animal life. Natural resources are in fixed supply however it is possible to exploit more of the available resources

Question 4

Define labour

Answer 4

Labour can be defined as the exercise of human and physical effort in the production of goods and services

Question 5

What can the quality of labour be described as?

Answer 5

Human capital which refers to the skills, knowledge and health of workers

Question 6

Define Capital

Answer 6

Capital comprised of all manufactured resources (machines, tools, buildings) which are used in the production of other goods and services.

When we produce capital goods we sacrifice present consumption for future consumption.

Question 7

Define entrepreneurship

Answer 7

Factors of production needs to be combined and organised. People who see opportunities and are willing to take risks by producing good in expectation that they will be sold, they add the initiators and the innovators and do this in anticipation of making profit.

Question 8

Define technology as the 5th factor of production

Answer 8

When new knowledge is put into practice and more goods and services add produced with a given level of FOP we say that tech has improved

Invention
Innovation

Question 9

Is money a factor of production? Explain why

Answer 9

No, although money is important it is not a FOP. Goods and services cannot be produced with money.

Question 10

Why is there a need for a choice on technique when producing goods and services?

Answer 10

One has to make a choice as to what the best method of product will be. Production often involves more than one technique, it can be capital intensive or labour intensive and depending on what product you are producing a choice must be made.

Question 11

Define 5 characteristics of a traditional system

Answer 11

1. The same goods are produced and distributed in the same way by each successive generation.
2. People use the same techniques of production as their parents did and production is distributed according to long established traditions
3. A traditional economy provides clear and easy answers to the 3 central questions
4. Slow to adapt to changing conditions and stubbornly resists innovation

5 economic activity is usually second to religious and cultured values.

Question 12

Define 4 characteristics of a command system

Answer 12

1. In a command system the participants are instructed what to produce and how to produce it by a central authority.
2. Command systems are also known as central planned systems.
3. Command economies are often described as socialist or communist systems.
4. Central planning refers to how economic activity is co ordinated while socialism and communism refer to the Ownership of the FOP

Question 13

What is a market?

Answer 13

A market is any contact or communication between potential buyers and potential sellers of a good or service

Question 14

Give 5 conditions for a market to exist?

Answer 14

1. There must be at-least one potential buyer and one potential seller
2. The seller must have something to sell
3. The buyer must have the means in which to purchase it
4. The market price must be defined
5. The agreement must be guaranteed by law or by tradition

Question 15

What are market prices

Answer 15

Market prices are signals of scarcity which indicates to consumers what they have to sacrifice to obtain the good or services concerned

Question 16

What is a market system?

Answer 16

1. A market system is one in which individual decisions and preferences are communicated and co ordinates through the market mechanism.
2. Market systems are often called capitalist systems and is characterised by private ownership.
3. Market capitalism is characterised by individualism, private freedom, private property, property rights, decentralised decision making and limited government intervention.
4. In market system, economic activity is driven by self interest.

Question 17

How does a market place answer the 3 central economic questions?

Answer 17

What - the answer is those good and services that consumers are willing to spend their income on and can be supplied profitably.

How - in a market system producers are forced to combine resources in the cheapest possible way. Their decisions on the combination of FOP are governed by the prices of the various factors and their productivity

For whom - in a market system the goods and services go to those who have the means to purchase them

Question 18

Why is completions an important feature of market systems?

Answer 18

Competition among sellers protects consumers against exploitation and promotes efficiency and growth. Such growth creates order among suppliers.

Question 19

Define a mixed economy

Answer 19

All economic systems are a mixture of traditional behaviour, central control and market determination. They are therefore often described as mixed systems, although one of these 3 mechanisms usually dominates.

Question 20

Answer 20

Question 21

Answer 21

Question 22

Answer 22

Question 23

Compare the advantages of the market system over the traditional and command system

Answer 23