1 Basic Economic Ideas & Resource Allocations

Question 1

3 Main economic questions

Answer 1

1 What to produce?
2 For whom to produce?
3 How to produce?

Question 2

Opportunity cost

Answer 2

The next best alternative foregone when making an economic decision

Question 3

Ceteris paribus

Answer 3

All things remain constant, so they can see the effect of one variable

Question 4

Normative statements

Answer 4

Statements based on opinions, beliefs and theories. Not real/ factual evidence involved

Question 5

Positive statements

Answer 5

Statements that is based on scientific/ factual evidence.
No valued judgement is involved

Question 6

Short run

Answer 6

Only some F.O.Ps change
- Output can only increase by using more of the variable factors

Question 7

Long run

Answer 7

All F.O.Ps change
- Output can be increased by using more of the variable factors

Question 8

Very long run

Answer 8

All F.O.Ps change
- Supply can change (technological advancement)

Question 9

Land + reward

Answer 9

Natural resources in an economy
Reward: Rent

Question 10

Labour + reward

Answer 10

Human resources in an economy
Reward: Wages/ salaries

Question 11

Capital + reward

Answer 11

Man-made goods that aid production / Goods used to make other goods
E.g Machinery, tools
Reward: Interest

Question 12

Market economy

Answer 12

• Resources are allocated through price mechanism, market forces of demand & supply
• Little to no government intervention involved

Question 12

Enterprise + reward

Answer 12

Organises the other 3 F.O.P
Takes risks
Aim: Profit maximisation

Question 12

Human capital

Answer 12

Intangible assets
- Skills, knowledge, experience workers gain from education & training
- Contributes to economic growth as it improves efficiency & productivity of workers

Question 12

Physical capital

Answer 12

• Tangible assets
• Technology, machinery used in production
• Directly increases production but may depreciate over time (wear and tear- machine parts become less efficient)

Question 13

Specialisation

Answer 13

Occurs when a country focuses on the production of a specific good that they have an advantage over others

Question 13

Division of labour

Answer 13

Occurs when the manufacturing process is split into sequences of individual tasks

Question 13

Production Possibility Curve (PPC)

Answer 13

Shows the maximum possible combination of two goods/services in an economy with the available resources and technology

Assumes that all resources are fully & efficiently utilised

Question 14

Advantages of specialisation

Answer 14

• Efficiency
• Expertise
• Increased productivity
• More output, better-quality, consumer satisfaction
• Effective resource allocation

Question 15

Disadvantages of specialisation

Answer 15

• Repetition of the same task, leads to boredom, likely to decrease productivity + efficiency
• May lead to low quality goods as workers are not motivated
• Occupational mobility, only specialised in one field, difficult to move between jobs

Question 16

Advantages of market economy

Answer 16

• Private sector firms aim = profit maximisation
• Because of this, innovation + competition decreases price for consumers
• More consumer choice because of this as well
• Highly responsive to demand

Question 16

Disadvantages of market economy

Answer 16

• Lack of public goods because of free-rider problem, private sectors dont provide because its free and their aim is profit maximisation
• Leads to market failure
• Income inequality
• Negative externalities (Profit > Social welfare/ external costs)

Question 16

Planned economy

Answer 16

The government decides the 3 main economic questions

Question 16

Advantages of planned economy

Answer 16

• Provision of public goods (no market failure)
• Reduced income inequality (e.g progressive tax, transfer payments)
• Long-term planning

Question 17

Disadvantages of planned economy

Answer 17

- Bureaucracy - Reduced incentive because government controls everything - Less consumer choice

Question 18

Disadvantages of mixed economy

Answer 18

- Conflict between private + public firms, may slow down the production process - Lacks clear direction

Question 18

Advantages of mixed economy

Answer 18

- Redistribution of income, govt can intervene address income inequality - Provision of public goods - Correct information failure, address negative externalities

Question 19

Mixed economy

Answer 19

Economy that has a combination of both private & public sector - Resource allocated through price mechanism & govt intervention

Question 20

Free goods

Answer 20

Goods that are naturally abundant, therefore has no opportunity cost E.g Air, sunlight Consumption of one individual does not lead to a decrease in availability for others

Question 21

Economic goods

Answer 21

Goods that are limited in supply, has an opportunity cost

Question 22

Private goods

Answer 22

Goods that are rivalrous and excludable

Question 23

Public goods

Answer 23

Goods that are non-excludable and non-rivalrous Free-rider problem

Question 24

Information failure/ imperfect information

Answer 24

Consumers do not have sufficient information about the positive & negative effects of goods, leading to poor economic decisions

Question 24

Demerit goods

Answer 24

Goods with negative externalities that are over-produced and over-consumed in an economy, due to consumers not being aware of the side effects E.g Tobacco, alcohol

Question 25

Merit goods

Answer 25

Goods that are usually under-provided and under-consumed in an economy as consumers are not fully aware of the positive benefits E.g Vaccines, education

Question 26

Causes of over-consumption of demerit goods

Answer 26

Information failure Addictiveness Inelastic

Question 27

Govt intervention to decrease consumption of demerit goods

Answer 27

Minimum price Indirect/ excise tax Regulations/ bans Warnings/ labels Advertisement