1 The Basic Economic Problem

Question 1

What is the economic problem?

Answer 1

There are finite resources and infinite wants and needs

Question 2

What are economic goods?

Answer 2

Goods that are scarce in relation to the demand for them (and therefore can be supplied for a price)

Question 3

What are free goods?

Answer 3

Goods that are abundant in relation to the demand for them (and therefore cannot be supplied for a price)

Question 4

Define factors of production and list the four factors of production

Answer 4

• Resources that are used to produce goods and services
• Land, labour, capital and enterprise

Question 5

Define land as a factor of production

Answer 5

Non man-made resources (i.e land, coal, wood, fish, etc)

Question 6

Define labour as a factor of production

Answer 6

Human input (mental/physical, skilled/unskilled)

Question 7

Define capital as a factor of production

Answer 7

Man-made resources (e.g tools, buildings, machinery, etc)

Question 8

Define enterprise as a factor of production

Answer 8

The process of taking risks in setting up/running a firm by an entrepreneur, the allocation of resources (other factors of production), & the aim of generating profit

Question 9

What are the rewards for selling factors of production?

Answer 9

Land –> rent
Labour –> wages
Capital –> interest
Enterprise –> profit

Question 10

What is mobility of the factors of production?

Answer 10

How easily a firm can switch between different factors of production during the production process

Question 11

Name two causes of immobility of labour

Answer 11

• Geographical immobility (workers cannot move to another location for work)
• Occupational immobility (inability to transfer between occupations due to limited skill set)

Question 12

What does a quantity/quality increase to the factors of production cause?

Answer 12

Outwards shift (on PPC) of potential output - more can be produced

Question 13

What does a quantity/quality decrease to the factors of production cause?

Answer 13

Inwards shift (on PPC) of potential output - less can be produced

Question 14

What is opportunity cost?

Answer 14

The loss of the next best alternative when making a decision

Question 15

What is a production possibility curve (PPC)?

Answer 15

Economic model that considers the maximum output of a country if it uses all of its factors of production to produce only two goods/services