Flashcards · 2281 · Topic 1

The basic economic problem flashcards

22 cards on Topic 1, subtopics 1.1 to 1.4. Pick a subtopic or study them all.

Study mode needs JavaScript. Every card is listed below, so you can still cover the answers and test yourself.

All 22 cards

For a quick read-through or printing. Cover the right-hand side to test yourself.

1.1 The nature of the economic problem

The economic problem: Resources are finite while wants are unlimited, so every consumer, worker, producer and government must make choices.
Give one example of the economic problem for a consumer, a worker, a producer and a government: Consumer: limited income and time, so must choose what to buy. Worker: limited hours, so must choose between pay and leisure. Producer: limited inputs and finance, so must choose what and how to produce. Government: limited tax revenue, so must choose how to share the budget.
Economic good vs free good: Economic good: scarce, uses resources to produce, has an opportunity cost and normally a price. Free good: not scarce, needs no resources to obtain, has no opportunity cost and no price.
Free school meals have a zero price to the pupil. Are they a free good?: No. They still use resources (food, cooks, kitchens), so they are scarce and have an opportunity cost. Someone else pays. A zero price does not make a good free.
Can the same item be a free good in one setting and an economic good in another?: Yes. Stream water for a village can be a free good; treated, piped water for a city uses resources, so it is an economic good. Say "in this setting" when giving an example.

1.2 The factors of production

The four factors of production and the reward to each: Land (natural resources used in production): rent. Labour (human physical and mental effort): wages. Capital (man-made resources such as machinery, tools, buildings): interest. Enterprise (organising the other three and bearing risk): profit.
Is money capital?: No. Capital is man-made goods used in production, such as machines, tools, factories and vans. Money can buy capital, but money itself produces nothing.
Why can the reward to enterprise be negative?: Profit is what is left after paying the other factors (rent, wages, interest). If revenue is less than those payments, the entrepreneur makes a loss.
Geographical mobility vs occupational mobility of a factor: Occupational mobility: how easily labour switches jobs (limited by skills and training). Geographical mobility: how easily a factor moves location (limited by cost and family ties). Land is completely geographically immobile.
Give two things that lower the geographical and two that lower the occupational mobility of labour: Geographical: high cost of moving or housing, family ties. Occupational: lack of skills or retraining, licences or qualifications needed. Low mobility can leave vacancies and unemployed workers side by side.
Closing capital stock formula. Opening stock 500, gross investment 60, depreciation 8% of opening stock: find the closing stock: Closing stock = opening stock + gross investment − depreciation. Depreciation = 500 × 0.08 = 40. Closing stock = 500 + 60 − 40 = 520.

1.3 Opportunity cost

Opportunity cost: The value of the next-best alternative given up when a choice is made, not everything else that could have been chosen.
A worker can spend a day on a trip (value 12), a course (value 9) or rest (value 5). She takes the trip. What is the opportunity cost?: The course, valued at 9. Only the next best option counts, not all the options given up, and not the gap of 12 − 9 = 3.
A field earns 9,000 growing barley or 7,500 growing oats. What is the opportunity cost of growing barley?: The 7,500 that oats would have earned, the next best use of the field.
How does opportunity cost affect a government decision?: The budget is limited, so more spending on one service (such as health) means less on another (such as schools), or higher taxes. The government should compare the benefits of the options.
Money cost vs opportunity cost: Money cost is the price paid. Opportunity cost is the benefit of the best alternative given up. Naming the price instead of the next best alternative is a common error.

1.4 Production possibility curve (PPC) diagrams

Production possibility curve (PPC): A curve showing the maximum combinations of two goods an economy can produce with its finite resources (fully and efficiently used, with given technology).
What does a point on, under and beyond a PPC show?: On: full and efficient use of resources (maximum output). Under: unemployed or inefficiently used resources. Beyond: not attainable with current resources and technology.
Straight-line PPC vs PPC bowed outward: Straight line: constant opportunity cost (resources suit both goods equally). Bowed outward (concave to the origin): increasing opportunity cost, because resources suit the two goods unequally, so each extra unit of one good costs more of the other.
Moving along a PPC raises good M from 10 to 14 and lowers good N from 90 to 78. Find the opportunity cost of one unit of M: Gain in M = 14 − 10 = 4. Loss of N = 90 − 78 = 12. Opportunity cost = good lost ÷ good gained = 12 ÷ 4 = 3 units of N per unit of M.
Movement along a PPC vs a shift of the PPC: Movement along: a change in the mix of goods produced; capacity is unchanged. Outward shift: capacity grows (potential growth). Moving from under the curve to the curve is actual growth, using idle resources.
Give two causes of an outward and two of an inward shift of a PPC: Outward: investment in capital, new technology, better education, more workers or new land. Inward: war, natural disaster, resource depletion, loss of workers.