LU 1 The Economic problem

Question 1

What is the basic Economic problem

Answer 1

Tension that exists between all the needs and wants we have as a society versus the resources we have available to satisfy these wants and needs

Question 2

Economics may be described as:

Answer 2

The science of choice

Question 3

Definition of Economics

Answer 3

We seek answers to the three basic questions:

What? How? and for Whom should it be produced?

Question 4

In Economics we study:

Answer 4

How people use their limited resources to gain the greatest possible satisfaction of their unlimited needs

Question 5

Three types of resources:

Answer 5

• Natural resources
• Human Resources
• Manufactured Resources

Question 6

Natural resources

Answer 6

Mineral Wealth, Fertile soil and fishing resources

Question 7

Human resources

Answer 7

Brain Power, Muscle Power (labour resources)

Question 8

Manufactured resources

Answer 8

Machines, equipment and tools

Question 9

Four factors of production:

Answer 9

• Labour
• Capital
• Land
• The entrepreneur

Question 10

Factor of production : Labour

Answer 10

Intellectual, physical or other human productive effort

Question 11

Factor of production: Capital

Answer 11

Means of production

Question 12

Factor of production: Land

Answer 12

Gifts of nature that include factors such as climate, mineral resource and the quality of soil

Question 13

Factor of production: The Entrepreneur

Answer 13

Person or entity that has the vision or idea or expertise to combine the factors of production.

Question 14

Opportunity cost

Answer 14

The value of the best forgone opportunity

Question 15

Three most important decision makes in an economy

Answer 15

• Households
• Firms
• Governments

Question 16

Households

Answer 16

Individuals, groups or families also known as consumers.

Question 17

Firms

Answer 17

Organisations responsible for the production and distribution of economic goods also known as producers

Question 18

Governments

Answer 18

Responsible for legislation, regulation and the provision of public goods

Question 19

Functions the governments perform

Answer 19

• Make laws
• Tax households and firms to provide essential services
• Make payments to households or firms to finance their expenditure

Question 20

Production problem

Answer 20

Scarcity of resources make it impossible to produce all the goods people want

Question 21

Distribution problem

Answer 21

How the total production of goods and services is going to be distributed among the members in the community

Question 22

Economic systems

Answer 22

• Traditional economy
• Command economy
• Market economy
• Mixed economy

Question 23

Traditional economy

Answer 23

Customs and beliefs determined decisions regarding production and distribution

Question 24

Command economy

Answer 24

All decisions about what, how and for whom goods and services are produced are taken by a central authority or ruling body.

Question 25

Market economy

Answer 25

Decisions about the what, how and for whom goods and services are produced are determined by markets and prices

Question 26

Mixed economy

Answer 26

Mixture of other economies

Question 27

Markets

Answer 27

Consists of thousands of buyers and sellers, thousands of households and firms

Question 28

Prices

Answer 28

Represent the value of products in monetary terms

Question 29

Market equilibrium

Answer 29

When there is a balance between the demand for and the supply of a specific product

Question 30

Aggregation

Answer 30

Process of combining smaller parts into a bigger whole

Question 31

Total production of the economy (P)

Answer 31

Add together the prices of all goods and services that flow through the market for consumer goods in one year =Total value of all goods and services produced

Question 32

Total expenditure of the economy (E)

Answer 32

Add the value of the money stream going through the market for consumer goods in one year.

Question 33

Total income earned in the economy (I)

Answer 33

Add the value of the money stream going through the market for production factors (Sum of all wages, interest, rent and profit)