AS Chapter 1 - Basic Economic Ideas And Resource Allocation

Question 1

Scarcity

Answer 1

A condition where there are insufficient resources to satisfy all the needs and wants of people

Question 2

Economic/private good

Answer 2

Relatively scarce and so will need to be allocated to a particular use in some way through a allocative mechanism

Question 3

Free good

Answer 3

One in which situation of scarcity does not apply so therefore does not need a mechanism to allocate it. The demand for the free good is equal to the supply of it at zero price

Question 4

Allocative mechanism

Answer 4

A method whereby scarce resources are distributed in an economy

Question 5

Economic problem

Answer 5

The situation of the relative scarcity of resources in relation to the unlimited wants and needs of people

Question 6

Choice

Answer 6

The need to make decisions about the possible alternative uses of scarce resources, given the existence of limited resources and unlimited wants and needs

Question 7

Needs

Answer 7

The demand for something that is essential, such as food or shelter

Question 8

Wants

Answer 8

The demand for something that is less important than the demand for a need, such as a new car, and which is not necessarily achieved by a consumer

Question 9

Opportunity cost

Answer 9

The cost of something in relation to a foregone opportunity, i.e. It indicates the benefits that could have been obtained by choosing the next best alternative

Question 10

Production possibility curve (PPC), production possibility frontier, production boundary, production transformation curve

Answer 10

A curve that joins together the different combinations of products that can be produced in an economy over a particular period of time given the existing resources and level of technology available.
Opportunity cost can be obtained from the PPC

Question 11

Investment

Answer 11

The expenditure on capital goods or assets, not for current consumption but for future consumption. It broadly refers to spending now on an asset that should generate an income at some point in the future

Question 12

Fixed capital formation

Answer 12

Investment in the form of buildings, plant, equipment, machinery and infrastructure

Question 13

Working capital

Answer 13

Investment in the form of stocks of finished goods or semi-finished goods that will either soon be consumed or turned into finished consumer goods

Question 14

Increasing opportunity costs

Answer 14

This occurs when the extra production of one good involves ever-increasing sacrifices of another

Question 15

Consumer good

Answer 15

Use it now, good for current consumption today

Question 16

Capital good

Answer 16

Used not now but in the future. Good in the long run. Investment

Question 17

Marginal rate of substitution

Answer 17

The rate at which a consumer is ready to give up one good in exchange for another good while maintaining the same level of utility.
= change in good Y / change in good X

Question 18

Utility

Answer 18

A measure of preferences over some set of goods

Question 19

Law of increasing opportunity cost

Answer 19

As production of one good rises, the opportunity cost of producing that good increases.

Question 20

Economic growth

Answer 20

An increase in the productive potential or real level of output of an economy. It is possible to distinguish between actual and potential growth in national output

Question 21

Law of demand

Answer 21

All other factors being equal, as the price of a good or service increases, consumer demand for the good or service will decrease, and vice versa.

Question 22

Ceteris paribus

Answer 22

Literally “all other things being equal”, the other factors which could influence a relationship between two variables are assumed to remain constant.

Question 23

Margin
Margin cost
Margin utility
Margin efficiency of capital

Answer 23

The point at which the last unit of a product is consumed or produced.
The additional cost of producing one more unit of a product.
The additional satisfaction gained from the consumption of one more unit of a product.
The additional output produced by the last unit of capital investment that has been employed in the process of production.

Question 24

Short run

Answer 24

At least one factor of production is fixed in supply (others change/is variable), output can only be increased by using more of the variable factors, technical progress is held constant.

Question 25

Long run

Answer 25

All factors are variable/changed, output can be increased by using more of all factors, technical progress is held constant

Question 26

Very long run

Answer 26

Technical progress is taking place, affecting the ability of firms to supply, all factors variable/changed

Question 27

Positive statement

Answer 27

A statement that is based on factual evidence

Question 28

Normative statement

Answer 28

A statement that is based upon beliefs rather than on factual evidence.

Question 29

Value judgement

Answer 29

A judgement that is a reflection of particular values or beliefs

Question 30

Resources

Answer 30

The inputs used to produce goods and services

Question 31

Land

Answer 31

The factor of production that is concerned with the natural resources of an economy, such as farmland or mineral deposits.

Question 32

Labour

Answer 32

The factor of production that is concerned with the workforce of an economy in terms of both physical and mental effort involved in production

Question 33

Capital

Answer 33

The factor of production that relates to the human-made aids to production

Question 34

Enterprise

Answer 34

The factor of production that takes a risk in organising the other three factors of production. The individual who takes this risk is known as an entrepreneur.

Question 35

Specialisation

Answer 35

The process by which individuals, firms, regions and whole economies concentrate on producing those products in which they have an advantage

Question 36

Division of labour

Answer 36

The process whereby workers specialise in, or concentrate on, particular tasks

Question 37

Economic system

Answer 37

The way in which a particular country attempts to answer the basic economic problem

Question 38

Market

Answer 38

A means of bringing together buyers and sellers to exchange products. A market can exist in a physical sense, but it can also be used to refer to an exchange of goods and services through the Internet or by telephone

Question 39

Market economy

Answer 39

Also known as market system, the type of economic system where decisions about the allocation of resources are taken in the private sector by producers and consumers.

Question 40

Price mechanism

Answer 40

The process by which changes in price (resulting from changes in demand and/or supply) bring about changes in the allocation of resources in a free market economy

Question 41

Planned or command economy

Answer 41

The type of economic system where decisions about the allocation of resources are taken by the state or by government agencies