1.1.1 - The Economic Problem

Question 1

What is the economic problem?

Answer 1

occurs when there are finite resources available to supply infinite or unlimited wants i.e. scarcity​

–> Therefore, choices have to be made about how to use these scarce resources​

Question 2

Define scarcity

Answer 2

shortage of resources in relation to the quantity of human wants.

[The problem of scarcity gives rise to opportunity cost]

Question 3

Define opportunity cost

Answer 3

the benefit lost of the next best alternative when making a choice​

[There is an opportunity cost for all decisions made by economic agents​]

Question 4

What are the three questions that the economic problem tries to address?

Answer 4

• What to produce: determined by what the consumer prefers.
• How to produce​: producers seek profits and aim to minimise production costs.
• Who to produce for: whoever has the greatest purchasing power in the economy, and is therefore able to buy the good

[This is the problem faced by individuals, producers and governments]

Question 5

Explain the difference between needs and wants

Answer 5

Needs are those things required that are essential to maintain survival. ​
Wants are those things that are desired but not essential to survival.​

Question 6

Define renewable and non-renewable resources

Answer 6

• renewable resources: a natural resource that can be replaced
• non-renewable resources: ones that are in finite supply and therefore will run out e.g. oil or natural gas​

Question 7

Define sustainable resources

Answer 7

Sustainable resources are ones that are being used for economic activities in such a manner that they will not run out​
–> However they must be used sensibly e.g. not over fishing and replanting trees​

Question 8

Define trade-offs

Answer 8

the balance between 2 choices - choosing more of one and less of the other​

Question 9

What is an economic agent

Answer 9

the individuals , firms and governments that partake in economic activity, the demand for and supply of goods and services​

Question 10

What is a free market economy?

Answer 10

one where firms decide what goods and services to produce with limited intervention from the government​

Question 11

What is a positive statement?

Answer 11

a statement that can be tested and validated

Question 12

What is a normative statement?

Answer 12

a statement that includes a value judgement and cannot be refuted just by looking at the evidence