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Economic Problem Flashcards

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1
Q

What is the basic economic problem?

A

How to allocate scarce resources given unlimited wants

This problem highlights the necessity of making choices in economics.

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2
Q

What are scarce resources?

A

Factors of production

Scarce resources are limited in availability compared to the unlimited wants of consumers.

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3
Q

What choices must be made in economics?

A
  • What to produce
  • How to produce
  • Who to produce for

These choices determine how limited resources are utilized.

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4
Q

What is opportunity cost?

A

Cost of the next best option not chosen

Opportunity cost reflects the value of the foregone alternative when a choice is made.

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5
Q

What does capital refer to in economics?

A

Goods used in production to make output

Capital is one of the factors of production and includes machinery, tools, and buildings.

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6
Q

What role does enterprise play in production?

A

Combines factors of production to produce outputs for profit

Enterprise is essential for innovation and economic growth.

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7
Q

What is meant by land in the context of factors of production?

A

Natural resources

Land includes all natural resources used in the production of goods and services.

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8
Q

What is immobility?

A

Immobility refers to factors of production struggling to change or move location.

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9
Q

What is geographical immobility?

A

Geographical immobility are barriers that prevent factors of production from moving location.

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10
Q

What are local connections?

A

Local connections refer to workers’ reluctance to leave friends and family.

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11
Q

What are frictions in the housing market?

A

Frictions in the housing market are the costs involved with relocating and buying and selling housing.

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12
Q

What are regional cost variances?

A

Regional cost variances refer to the differences in the cost of living across a country.

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13
Q

What is occupational immobility?

A

Occupational immobility are barriers that prevent factors of production from changing industry.

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14
Q

What is an example of occupational immobility?

A

Workers in mines acquire specific skills that are not transferable to other industries.

This leads to structural unemployment when mining jobs are lost.

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15
Q

How does immobility affect factors of production?

A

Immobility occurs when the productive process doesn’t work for other goods, leading to misallocation of resources.

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16
Q

Why does factor mobility cause market failure?

A

Factor mobility causes market failure because if factors of production cannot adapt to changes, resources will become unused.

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17
Q

What are some solutions to geographical immobility?

A

Solutions include reducing housing market friction, providing subsidies for relocation, and bringing jobs to workers through regional policy.

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18
Q

What are some solutions to occupational immobility?

A

Solutions include providing retraining and education schemes, slowing down the decline of struggling industries, and incentivizing other industries to employ redundant workers.

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19
Q

What is the economic problem?

A

The economic problem is how to satisfy unlimited needs and wants with finite resources.

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20
Q

How can we allocate limited resources effectively?

A

By using the price mechanism.

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21
Q

What are the three main functions of prices?

A

The three main functions of prices are rationing, signaling, and incentive.

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22
Q

What is the rationing function of prices?

A

Prices help to ration limited resources by determining who can purchase goods based on their value.

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23
Q

How is the price of a good determined?

A

The price of a good is determined by demand relative to supply.

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24
Q

Who purchases a good at its price?

A

Only consumers who view the good as worth the price will purchase it.

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25
What does the signaling function of prices do?
Prices signal information about a market to economic agents.
26
Why is signaling important?
Signaling helps economic agents make informed decisions to maximize utility or profit.
27
What does rising prices indicate?
Rising prices signal there is excess demand.
28
What does falling prices indicate?
Falling prices signal excess supply.
29
What is the incentive function of prices?
Prices act as an incentive for economic agents to adjust their behavior.
30
How do higher prices incentivize suppliers?
Higher prices provide the opportunity for higher profits, incentivizing suppliers to produce more output.
31
How do higher prices affect consumer behavior?
Higher prices disincentivize consumption of a good as consumers may choose to spend elsewhere.
32
What happens when there is excess demand in the market?
The price rises, signaling that the market is in excess demand.
33
What is the role of the price mechanism in free markets?
Free markets rely upon the price mechanism to allocate resources.
34
What is a command economy?
A command economy is where a specified group of people determines the allocation of resources.
35
What is a mixed economy?
A mixed economy relies upon the price mechanism in some markets but not all.
36
What are some markets unsuitable for the price mechanism?
Markets unsuitable for the price mechanism include healthcare and defense.
37
Why might the rationing function be inappropriate in healthcare?
The question arises whether healthcare should be available to all or only to those who can afford it.
38
What is an example of altruism in the incentive function?
People may give blood as an altruistic act, where payments may act as a disincentive.
39
What are the benefits of the price mechanism?
It allocates resources according to what people want, communicates preferences, and ensures firms respond to those preferences.
40
What is the economic problem?
The economic problem is how to satisfy unlimited needs and wants with finite resources.
41
How can we allocate limited resources effectively?
By using the price mechanism.
42
What are the three main functions of prices?
The three main functions of prices are rationing, signaling, and incentive.
43
What is the rationing function of prices?
Prices help to ration limited resources by determining who can purchase goods based on their value.
44
How is the price of a good determined?
The price of a good is determined by demand relative to supply.
45
Who purchases a good at its price?
Only consumers who view the good as worth the price will purchase it.
46
What does the signaling function of prices do?
Prices signal information about a market to economic agents.
47
Why is signaling important?
Signaling helps economic agents make informed decisions to maximize utility or profit.
48
What does rising prices indicate?
Rising prices signal there is excess demand.
49
What does falling prices indicate?
Falling prices signal excess supply.
50
What is the incentive function of prices?
Prices act as an incentive for economic agents to adjust their behavior.
51
How do higher prices incentivize suppliers?
Higher prices provide the opportunity for higher profits, incentivizing suppliers to produce more output.
52
How do higher prices affect consumer behavior?
Higher prices disincentivize consumption of a good as consumers may choose to spend elsewhere.
53
What happens when there is excess demand in the market?
The price rises, signaling that the market is in excess demand.
54
What is the role of the price mechanism in free markets?
Free markets rely upon the price mechanism to allocate resources.
55
What is a command economy?
A command economy is where a specified group of people determines the allocation of resources.
56
What is a mixed economy?
A mixed economy relies upon the price mechanism in some markets but not all.
57
What are some markets unsuitable for the price mechanism?
Markets unsuitable for the price mechanism include healthcare and defense.
58
Why might the rationing function be inappropriate in healthcare?
The question arises whether healthcare should be available to all or only to those who can afford it.
59
What is an example of altruism in the incentive function?
People may give blood as an altruistic act, where payments may act as a disincentive.
60
What are the benefits of the price mechanism?
It allocates resources according to what people want, communicates preferences, and ensures firms respond to those preferences.
61
What is consumer surplus?
Consumer surplus is the difference between the price consumers are willing and able to pay and what they actually pay.
62
What is producer surplus?
Producer surplus is the difference between the price producers are willing and able to supply a good or service for and the price they actually receive.
63
What is joint demand?
Joint demand refers to complementary goods; if the price of good A increases, the demand for the complementary good shifts inward. ## Footnote Example: Printers and ink.
64
What are substitute goods?
Substitute goods are those where an increase in the price of good A leads to an outward shift in demand for good B.
65
What is derived demand?
Derived demand is the demand for inputs; for example, if the demand for cars increases, the demand for aluminum also increases. ## Footnote Example: Cars and aluminum.
66
What is composite demand?
Composite demand refers to a good that has two uses; an increase in demand for good A results in a reduction in supply for good B. ## Footnote Example: Wheat being used for both bread and livestock food.
67
What is joint supply?
Joint supply refers to byproducts; an increase in demand for good A results in an increase in supply of good B. ## Footnote Example: Honey and beeswax.
68
What does PED measure?
PED measures the responsiveness of quantity demanded to a given price change.
69
What is the formula for PED?
PED = % Change in Quantity Demanded / % Change in Price
70
What does a PED value greater than 1 indicate?
PED > 1 indicates elastic demand.
71
What does a PED value less than 1 indicate?
PED < 1 indicates inelastic demand.
72
What does a PED value equal to 1 indicate?
PED = 1 indicates unitary elastic demand.
73
What are the causes of PED?
Causes of PED include: - Substitutes available - Percentage of income spent - Luxury vs necessity - Addictive or habitual goods - Time period considered.
74
How does PED affect firms' revenue?
For elastic demand (PED > 1), price increase leads to a decrease in total revenue. For inelastic demand (PED < 1), price increase leads to an increase in total revenue.
75
What does PES stand for?
PES stands for Price Elasticity of Supply.
76
What is the date and time mentioned for PES?
08 April 2025, 13:06.
77
What does PES measure?
PES measures the responsiveness of supply to a change in price.
78
What is the formula for PES?
PES = % Change in Quantity Supplied / % Change in Price.
79
What are the values of PES?
PES >1 elastic , PES <1 inelastic, PES =1 unitary. PES=0 perfectly inelastic PES=infinity perfect inelastic
80
What causes variations in PES?
Causes of PES include production costs, stocks, spare capacity, substitutes for factors of production, and time.
81
What does XED measure?
XED measures the responsiveness of a good given a change in the price of another good.
82
What is the formula for XED?
XED = % Change in quantity demanded of Good A / % Change in price of Good B
83
What does a XED value greater than 1 indicate?
A XED value greater than 1 indicates that the goods are elastic (strong substitutes).
84
What does a XED value less than 1 indicate?
A XED value less than 1 indicates that the goods are inelastic (weak substitutes).
85
What does a XED value of 0 indicate?
A XED value of 0 indicates that the goods are perfectly inelastic (no substitution).
86
What does YED measure?
YED measures responsiveness of demand to a change in income.
87
What is the value of YED given in the text?
YED = 1.490
88
What does a YED value of >1 indicate?
A YED value of >1 indicates income elastic goods.
89
What does a YED value of <1 indicate?
A YED value of <1 indicates income inelastic goods.
90
What does a YED value of 1 indicate?
A YED value of 1 indicates unit elastic goods.
91
What type of goods are considered inferior?
Inferior goods have a YED value of <0.
92
What type of goods are considered normal?
Normal goods have a YED value of >0.
93
What type of goods are considered luxury?
Luxury goods have a YED value of >1.
94
What type of goods are considered necessities?
Necessities have a YED value of <1.

econ max (28 decks)

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