Unit 1 - The Basic Economic Problem

Question 1

Describe the basic economic problem.

Answer 1

There are not enough resources to produce all the goods and services which consumers want.

Question 2

Describe SCARCITY in Economics.

Answer 2

Scarcity arises because human wants for goods and services are unlimited.
Resources required to produce them are limited.
Scarce goods fetch a price and price is determined by relative scarcity.
Scarcity requires the careful allocation of resources.
Scarcity is when wants for a product are greater than its supply.
Scarcity CANNOT be resolved.

Question 3

Describe SHORTAGE in Economics.

Answer 3

A shortage is when the demand for a product is greater than its supply.
Shortage can be resolved by raising the price to reduce demand.
Scarcity is a relative concept. - relative to our wants, there will be never be sufficient resources to satisfy them.

Question 4

Describe ECONOMIC goods.

Answer 4

Not enough goods to satisfy everyone’s wants.

Goods that have a price like a watch.

Question 5

Describe FREE goods.

Answer 5

Free goods are those goods of which there are enough to satisfy everyone’s wants e.g. fresh air, sea water.
A free good does not require any economic resources to produce it and so it is abundantly supplied at no cost.

Question 6

Describe/Explain OPPORTUNITY COST.

Answer 6

Opportunity cost is the next best thing that you’re forced to give up.
(EXPLAIN) This is because there are limited resources and not all our wants can be satisfied, so choices need to be made.
Government spending on health and not infrastructure.
Individual buying a new car but not going on holiday.
Firms deciding to increase production of a good over another.

Question 7

Describe EFFICIENCY.

Answer 7

Efficiency is concerned with how well resources such as time, talents or materials, are used to produce an end result.

Question 8

Describe TECHNICAL EFFICIENCY.

Answer 8

Technical efficiency exists if a given quantity of output is produced with the minimum number of inputs.

For instance, if a firm produces 1000 units of output using 10 workers when it could have used 9 workers, then it would be technically inefficient.

Question 9

Describe PRODUCT EFFICIENCY.

Answer 9

Exists when production is achieved at lowest cost.

Question 10

Describe ECONOMIC EFFICIENCY,

Answer 10

Is concerned with whether resources are used to produce the goods and services that consumers most want.

Question 11

Describe OCCUPATIONAL MOBILITY.

Answer 11

OCCUPATIONAL MOBILITY: concerns the movement of a factor of production from one occupation to another.

Question 12

Describe GEOGRAPHICAL MOBILITY.

Answer 12

GEOGRAPHICAL MOBILITY - describes the movement from one location to another.

Question 13

Describe/Explain how MOBILITY can be improved.

Answer 13

A government can seek to improve labour market efficiency by removing the imperfections which occur in the labour market.

• education and training - give grant to for training, improve access to further education
• providing labour market information (e.g. vacancies, wage rates, required skills)
• legislation - introduction of the living wage to incite people to work.

Question 14

Describe PLANNED ECONOMIES.

Answer 14

All resources are controlled by the government.
Government plan what will be produced AND controls the prices.
Little competition.
Firms have limited freedom.

Question 15

Advantages of a PLANNED ECONOMY.

Answer 15

Wealth/income is fairly distributed.

Basic goods are made available to ALL at a fair price.

Question 16

Disadvantages of a PLANNED ECONOMY.

Answer 16

Not much choice for consumers.
Resources can be allocated inefficiently - due to lack of planning.
No incentive for firms to produce.

Question 17

Describe MARKET ECONOMIES.

Answer 17

Limited role of state.
Resources are owned by private individuals.
Competition exists.
Resources are allocated through price mechanism.

Question 18

Advantages of a MARKET ECONOMY.

Answer 18

Freedom for consumers in terms of choice.
Markets are cleared due to price mechanism.
Technical efficiency in production as producers strive to keep down costs.

Question 19

Disadvantages of a MARKET ECONOMY.

Answer 19

Markets can allocate resources inefficiently.

Question 20

Describe MIXED ECONOMIES.

Answer 20

Is a mixture of PRIVATE and PUBLIC sectors.
In the private sector the price mechanism allocates resources.
The public sector i.e. government intervenes when the private sector fails to produce in an efficient way the goods and services which consumers want.

Question 21

Describe does the PRICE MECHANISM allocates resources?

Answer 21

The price mechanism uses the forces of demand and supply to determine the price of a good or service.
If demand for a good or service is rising, the price will initially tend to rise because there is a shortage.
This will encourage existing and new suppliers to increase their supply by using more economic resources to make the good or service and provide it to the market.
The market determines how economic resources will be used (allocated) in an economy. Likewise, votes against a good or service by falling.
Producers alter supply in response to changing levels of price and profit.

Question 22

Describe MARKET FAILURE.

Answer 22

A market failure occurs when a market allocates resources inefficiently.

Question 23

Describe the CAUSES of MARKET FAILURE.

Answer 23

1. Failure to produce public goods (a missing market)
   Public goods have two characteristics:
   (i) Non-excludable – it is not possible to prevent any other consumer
   from benefiting from the good or service. This is known as the free rider problem.
   (ii) Non-diminishable or non-rivalrous – consumption by one individual
   does not reduce the amount available for consumption by others.
2. Failure of producers to produce sufficient merit goods. (underprovided)

A merit good adds to the quality of life and is one society believes people ‘ought to have’ whether they can afford it or not. It should be available for all.
Examples include education, healthcare, art galleries.

3. The over production and consumption of demerit or undesirable goods. A demerit good is the opposite of a merit good. Examples include: alcohol, tobacco and addictive drugs.

Consumption of these products by an individual produces negative externalities which harm the wider community; e.g. the costs of damage and injury inflicted on others due to tobacco smoke or road accidents caused by drunk drivers.

4. Production methods which take little account of external costs.

An externality is a special type of public ‘bad’ which is ‘dumped’ by those who produce it on other people (known as third parties) who receive it or consume it, whether or not they choose to.

5. Monopolies and oligopolies are situations where the market is dominated by one (monopoly) or a small number (oligopoly) of large firms who have a significant share and control of a market. Due to their power in the market they can engage in restrictive practices (anti-competitive) which eliminate the benefits of competition.
6. Wide inequalities in income and wealth.

Inequality is regarded by some economists as a form of market failure, and by others as a cause or effect of market failure.