Basic Economic Problem

Question 1

What is the basic economic problem?

Answer 1

The basic economic problem refers to the problem where human wants are unlimited while resources are limited and have alternate uses, leading to producers and consumers needed to make choices. This leads to scarcity.

Question 2

What is scarcity?

Answer 2

Scarcity means limited resources.
Due to scarcity of resources, people and societies must make decisions.

Question 3

Relate production and consumption to utility.

Answer 3

Production - creates utility
Consumption - exhaust utility

Question 4

What is an economic good?

Answer 4

An economic good is a good which has both a price (making it excludable) as well as an opportunity cost. An example is a car.

Question 5

What is a free good?

Answer 5

A free good is a good which does not have a price, nor an opportunity cost. An example is sunlight.

Question 6

How do we decide whether a good is a free good or an economic good?

Answer 6

Whether a good is a free good or an economic good depends on its availability.

For example, at the beach, sand is free good. However, in a urban city, it becomes an economic good as to access it you would have to buy it.

Question 7

What decisions do producers and consumers need to make?

Answer 7

Consumers -
1. Decide when to purchase something
2. Decide whether or not to look for alternatives

Producers -
1. Decide on a pricing strategy
2. Investing to increase production capacity

Question 8

What are the basic economic questions?

Answer 8

The basic economic questions, or the three economic questions are:

1. What to produce?
2. How to produce?
3. For whom to produce?