micro - scarcity and choice

Question 1

what is the basic economic problem?

Answer 1

there are limited resources in a society, which leads to the problem of scarcity - a situation that arises because people have unlimited wants in the face of limited resources. Therefore, choices must be made by individuals, firms and governments on how resources should be allocated among the population for the consumption of goods and services.

Question 2

what is scarcity?

Answer 2

a situation that arises because people have unlimited wants in the face of limited resources.

Question 3

what is the difference between ‘needs’ and ‘wants’?

Answer 3

needs are necessary to sustain life whereas wants are things that people want to consume.

Question 4

what are factors of production?

Answer 4

the inputs that are used in the production of goods or services in order to make an economic profit. The four factors of production are land (this includes any natural resources provided by the planet), labour, capital (things that are man made to aid production for example machinery), and entrepreneurship (human intelligence to support the other factors).

Question 5

what are the four main economic agents and their choices?

Answer 5

households - make choices about expenditure and aim to maximise satisfaction.
firms - make choices about what goods and services to produce, and aim to maximise profit.
governments undertake expenditure for the economy and aim to maximise welfare.

Question 6

whats a free good?

Answer 6

A good with zero opportunity cost. This means that it can be produced by society in as much quantities as possible e.g. air.

Question 7

whats an economic good?

Answer 7

any good with an opportunity cost, which is scarce and takes time and resources to produce e.g. NHS funding (not free).

Question 8

what 3 questions did US Economist Paul Samuelson identify?

Answer 8

what? - goods and services should be produced in a society from its scarce resources?
how? - should the productive resources of the economy be used to produce these various goods and services?
For whom? - how should these goods and services be allocated among the population for consumption?

Question 9

what is a positive statement?

Answer 9

statements about “what is”. A positive statement may be right or wrong as it can be tested against the facts.

Question 10

what is a normative statement?

Answer 10

statements that express judgement. They depend on values and cannot be tested.

Question 11

what is micro-economics?

Answer 11

the study of economic decisions taken by individual economic agents. Tend to focus on individual markets.

Question 12

what is macroeconomics?

Answer 12

the study of interrelationships between economics variables at an aggregate economy wide level.

Question 13

what is meant by the term ‘opportunity cost’?

Answer 13

the value or benefits forgone of the next best alternative when a choice is made.

Question 14

what is a market?

Answer 14

a market is a place where buyers and sellers meet in order to exchange goods and services.

Question 15

what is a ‘market’ economy?

Answer 15

a market economy exists where the market decides on what is produced, how and for whom. The market system allocates scarce resources through the price mechanism. Adam Smith called this the “invisible hand.”

Question 16

what are the basic characteristics of a market?

Answer 16

1. a physical place or some mechanism whereby buyers and sellers can meet, and contact each other.
2. a willingness to trade or exchange goods and services (usually with money).
3. they are interactive - the interaction of buyers and sellers can determine the price.

Question 17

whats a sub-market?

Answer 17

a recognised or distinguished part of the market. Also known as a market segment.

Question 18

what is the price/market mechanism?

Answer 18

the price or market mechanism is the interaction of the market forces of supply and demand. Therefore, an equilibrium price or quantity is reached, such that any and all demand is satisfied and all supply is sold - best way of allocation of scarce resources?

Question 19

what signals does the market send to both parties (consumers and suppliers)?

Answer 19

if price fall-
this signals consumers that the product is relatively cheap and they are likely to buy more.

if price fall-
this signals suppliers that the price of the product has fallen, and therefore, to stay competitive, they will have to reduce their prices.

Question 20

what is rationing?

Answer 20

controlled distribution of goods and services, or an artificial restriction of demand. The greater the scarcity, the higher the price and the more the resource is rationed

Question 21

what is an incentive?

Answer 21

something that motivates someone to behave in a certain way.

Question 22

what is specialisation?

Answer 22

occurs when an individual (or a firm, region or country) concentrates on producing a limited range of products
to maximise efficiency.

Question 23

what is division of labour?

Answer 23

refers to specialisation by individual workers. It involves breaking down production into many different tasks, with each worker specialising in one task.

Question 24

what are the benefits of specialisation?

Answer 24

constantly doing the same task can improve a worker’s efficiency, increasing productivity.
exchange between developed and less developed countries.
each worker can have one machine, saving costs.
each worker stays in one place, saving time.

Question 25

what are the disadvantages of specialisation?

Answer 25

for an individual - boredom from constantly repeating the same job, may lead to carelessness and inefficiency.
for a firm - changing consumer tastes or needs, may cause difficulties e.g. deindustrialisation - loss of jobs.
for a nation - bad weather, war, political conflict e.g. aftermath of 9/11.

Question 26

how does specialisation help with the basic economic problem?

Answer 26

it enables people to produce goods and services more efficiently, and as a result, society has more goods and services which to satisfy needs and wants.

Question 27

what must individuals/firms/governments do in order to acquire other resources that satisfy needs and wants?

Answer 27

large quantities of one good (limited range) - trade/exchange.

Question 28

what is required in order to exchange?

Answer 28

means of exchange - used to facilitate the sale, purchase or trade of goods and services between parties. Must represent a standard of value.

Question 29

what is the problem with a barter system?

Answer 29

it requires a double coincidence of wants - “I want what you have.”

Question 30

why is money a good medium of exchange?

Answer 30

people could use it according to their needs.

Question 31

money must be…

Answer 31

divisible
trustworthy
portable
acceptable to both buyers and sellers
act as a store of value
be a unit of account
be a standard of deferred (delayed) payment

Question 32

what are the strengths of a market economy?

Answer 32

it is led by the needs and wants of consumers.

competition and the profit motive act as incentives to use resources as efficiently as possible.

the market reacts automatically to changes in needs and wants.

it requires no administration.

Question 33

what are the weaknesses of a market economy?

Answer 33

it can lead to inequality and thus not maximise economic welfare.

market failure can lead to over-provision of undesirable goods such as tobacco, and under provision of desirable goods such as education.

it does not consider the impacts of goods on third parties such as noise and air pollution.

Question 34

what is a production possibility curve?

Answer 34

this shows the maximum quantities of different combinations of output of two products, given that current resources and technology are being fully utilised.

Question 35

on a PPC, what is economic growth caused by?

Answer 35

increased quantity of factors of production.
improved quality of F.O.P
new tech, new techniques - improve business efficiency.
adopting a long term growth strategy.

Question 36

“a PPC can show trade-off” - what’s trade off?

Answer 36

the calculation involved in deciding on whether to give up the production of one product for another.

Question 37

why is the PPC curved?

Answer 37

drawn as a concave to the origin - extra output resulting from allocating more resources to one particular good may fall.