Basic Economic Problem And Opportunity Cost

Question 1

What is opportunity cost?

Answer 1

The value of the next best alternative foregone when a choice is made

Question 2

Basic economic problem

Answer 2

Infinite needs and wants and finite resources.
Resources are scarce in relation to wants

Question 3

3 questions used to make choices about how to allocate resources

Answer 3

• what to produce
• for whom to produce
• how to produce

Question 4

FOPs

Answer 4

• land (natural physical resources)
• labour (human input)
• capital (man made resources)
• enterprise/entrepreneurship (ability and willingness to organise, coordinate, and take risks in production process)

Question 5

Rewards to FOPs

Answer 5

• land = rent
• labour = wages
• capital = interest
• enterprise = profit

Question 6

What rational economic agents aim to maximise

Answer 6

• consumers = total utility
• workers = wages and benefits from work
• producers = profit
• government = social welfare

Question 7

Positive statements

Answer 7

Describe world as it is, without making value judgements.
Based on objective facts and can be proven/disproven

Question 8

Normative statements

Answer 8

Express an opinion about what ought to be
Subjective statements - carry value judgements

Question 9

What does a PPF show

Answer 9

Shows max possible output combinations of 2 goods/services an economy can achieve when all resources are fully and efficiently employed

Question 10

Law of diminishing returns

Answer 10

The marginal (extra) output of consumers goods diminishes as more factories resources are allocated to it
PPFs are usually curved because of this

Question 11

What causes an outward shift in PPF?

Answer 11

• increase in quantity of FOPs
• increase in quality of FOPs
• advance in tech

Question 12

What causes inward shift in PPF?

Answer 12

• decrease in quantity of FOPs
• decrease in quality of FOPs

Question 13

What does a straight line PPF show?

Answer 13

Indicates resources are equally efficient at producing both goods on the axes
OPP cost is constant

Question 14

What does a non parallel shift in PPF show?

Answer 14

A technological advance in ‘car’ production only (the x axis)

Question 15

What is factor mobility?

Answer 15

Occurs when factors of production can easily be moved from one use to another

Question 16

Geographical mobility

Answer 16

Resources can move easily between regions/areas/countries

Question 17

Occupational mobility

Answer 17

Resources can move easily between different types of work

Question 18

Geographical immobility of labour

Answer 18

Labour may not be fully mobile becuase of regional house price variation, family and social ties, children in school etc.

Question 19

Occupational immobility of labour

Answer 19

Occurs due to insufficient education and training, lack of transferable skills, inability to afford training etc.

Question 20

Is land geographically or occupationally mobile?

Answer 20

Occupationally
Eg. Land used for agriculture or housing

Question 21

Is capital occupationally mobile or geographically mobile or both?

Answer 21

Both
Eg. Hand tools or vehicles are but heavy industry capital may not be mobile at all

Question 22

The division of labour

Answer 22

Form of specialisation where tasks needed to produce an item are divided among workers

Question 23

Adam smith

Answer 23

Said that specialisation leads to increased productivity and economic growth in the wealth of nations (book)

Question 25

Advantages of specialisation

Answer 25

Increased productivity - greater output from same resources - workers become more skilled and experienced in specific tasks leading to higher efficiency - develop specialist machinery Lower costs - reduced training time and waste Economies of scale - mass production possible - larger quantities of identical goods can be produced more efficiently

Question 26

Disadvantages of specialisation

Answer 26

Higher staff turnover - workers may get bored of repetitive tasks and feel unrehearsed leading to job dissatisfaction Dependency - over reliance makes units vulnerable to staff illness or economic shocks Structural unemployment - workers trained in fewer skills - machines can replace some labour tasks Lack of variety - mass production can reduce choice

Question 27

Define money

Answer 27

Anything generally accepted in payment off a debt; removes the need to barter, avoiding double conscience of wants

Question 28

Characteristics of money

Answer 28

- acceptable to all - portable - durable - easily divisible - uncounterfeitable - scarce in supply

Question 29

4 functions of money

Answer 29

- medium of exchange - unit of account - store of value - debt settling

Question 30

What is an economic system?

Answer 30

A network of individuals, organisations and institutions used by a society to resolve basic problem of what, how much, how and for whom to produce

Question 31

Free market economy (capitalist)

Answer 31

- private ownership of resources - owners of resources and producers are free to buy/sell - economic agents motivated by self-interest - consumers have sovereignty - determine what’s produced by being willing and able to buy goods and services - income depends on market value of an individuals work - resources allocated by price mechanism

Question 32

Advantages of free market

Answer 32

- resources can be bought and sold - consumer sovreignity - freedom of choice - profit-motive and self-interest incentivises - incentive to work harder for higher wages, productivity rises - firms face competitive forces, driving down prices -incentive to innovate and invest in new ideas ( dynamic efficiency)

Question 33

Disadvantages of free market

Answer 33

- income/wealth inequality, and poverty - market failure can reduce social welfare - lack of provision off public goods - over-provision of demerit goods - under-provision of merit goods - info gaps can cause market failure - unemployment/worker exploitation/low pay for some - environmental depletation/degradarion -resources may be wasted on advertising and marketing - firms may develop monopoly power and push up prices - macroeconomic instability

Question 34

Invisible hand theory

Answer 34

- invented by Adam smith - if agents act in own best interests, forces of S and D in market can promote efficient allocation of scarce resources for society

Question 35

Friedrich Hayek

Answer 35

- belief in individual in economy not gov - favoured market economies - though small group of individuals in gov would never have enough info to meet people’s needs

Question 36

Price mechanism

Question 37

Command economy

Answer 37

- gov owns and allocates resources - gov sets production targets and growth rates according to view of peoples wants - goods allocated through rationing - workers given job by gov - market prices don’t inform resource allocation - queuing used to ration scarce goods

Question 38

Advantages of command

Answer 38

- resources allocated by gov to maximise social welfare - relatively even distribution of income/wealth - workers given jobs by state, no unemployment - adequate provision off public public goods - gov should take externalities into account in decision making - environmental protection possible - gov can invest. In economy’s infrastructure easily - policies to manage macroeconomy - welfare safety net - national interest considered rather than individual profits

Question 39

Karl Marx

Answer 39

- communism - ‘common ownership of the means of production’ - said free markets were chaotic and had surplus of labour; labour population and population growth push wages down and workers exploited - said capitalism would push workers towards revolution against capital owner

Question 40

Disadvantages of command

Answer 40

- danger of gov failure - hard for gov to set and correct output planning targets and appropriately fix prices - gov may not have enough info to make good decisions - bureaucratic (lots of red tape which reduces efficiency) - underemployment - lack of choice for consumers - lack of innovation and entrepreneurship - lower productivity, lack of incentives to work hard - corruption - shadow market activity

Question 41

Mixed economies

Answer 41

- resources allocated by price mechanism when it works efficiently but gov intervenes to correct market failures - aims to achieve best aspects for both markets while voiding their disadvantages

Question 42

Traditional economies

Answer 42

Characterised by family groups, low productivity, little specialisation, barter trade and no surplus production for investment - in underdeveloped regions

Question 43

Transition economies

Answer 43

In process of moving from command to free - markets liberalised - state assets privatised - state subsidies removed Can cause short term problems eg. Inflation and unemployment - Cuba and Eastern European countries