Basic economic problem

Question 1

What is the basic economic problem

Answer 1

Income is limited relative to wants (scarcity)

Question 2

Explain why the basic economic problem forces us to make an opportunity cost

Answer 2

Have to make choices on how to allocate scarce resources effectively
i.e sacrifices

Question 3

What is marginal benefit and marginal cost

Answer 3

• Marginal benefit is the utility gained
• Marginal cost is the sacrifice made for that utility.
• This is what is taken into account when making an opportunity cost

Question 4

Explain how opportunity costs relate to the government

Answer 4

• Government has to choose what public service to spend on
• Increasing tax reduces private consumption for families

Question 5

What is the difference between productive efficiency and allocative efficiency

Answer 5

• Productive efficiency is the full utililisation of the factors of production
• Allocative efficiency is how well resources are distributed to provide the most value to society

Question 6

How is productive efficiency and allocative efficiency shown on the PPF curve

Answer 6

• Productive efficiency is any point on the PPF
• Allocative efficiency is perfect point on the PPF according to demand