Basic Economic Problems and Factors of Production
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Basic Economic Problems and Factors of Production

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Questions and Answers

What is the basic economic problem?

Scarcity of resources is the basic economic problem.

Which of the following are types of goods?

  • Free goods (correct)
  • Scarce goods
  • Luxury goods
  • Economic goods (correct)
  • What does opportunity cost refer to?

    Opportunity cost is the cost of choosing between alternative uses of resources.

    Identify the four factors of production.

    <p>Land, Labour, Capital, Enterprise.</p> Signup and view all the answers

    What is the opportunity cost in the example of investing $10,000 in stocks?

    <p>The opportunity cost is the value of the potential interest that could have been earned if the money was left in a bank account.</p> Signup and view all the answers

    Occupational mobility refers to the ability to relocate from one area to another.

    <p>False</p> Signup and view all the answers

    What are the main focuses of microeconomics?

    <p>Individual agents and markets</p> Signup and view all the answers

    What is elasticity in economics?

    <p>Measures responsiveness of quantity to price changes.</p> Signup and view all the answers

    What does GDP stand for?

    <p>Gross Domestic Product</p> Signup and view all the answers

    Monetary policy involves government spending and taxation.

    <p>False</p> Signup and view all the answers

    Which economic theory emphasizes the role of demand in economic fluctuations?

    <p>Keynesian Economics</p> Signup and view all the answers

    The economic concept of __________ suggests that countries should specialize in producing goods they can produce more efficiently.

    <p>Comparative Advantage</p> Signup and view all the answers

    Loss aversion is the tendency to prefer gaining over losing.

    <p>False</p> Signup and view all the answers

    What are trade barriers?

    <p>Tariffs, quotas, and regulations affecting international trade.</p> Signup and view all the answers

    What is behavioral economics?

    <p>Studies the effects of psychological factors on economic decisions.</p> Signup and view all the answers

    Match the following economic theories with their key ideas:

    <p>Classical Economics = Free markets and minimal government interference Keynesian Economics = Demand's role in economic fluctuations Supply-Side Economics = Boosting supply through tax cuts Behavioral Economics = Psychological insights in economic decisions</p> Signup and view all the answers

    Study Notes

    The Basic Economic Problem

    • The basic economic problem is that there are too few productive resources to make all the goods and services that consumers need and want.
    • This is because of unlimited wants and limited resources.
    • Scarcity of resources cause the basic economic problem.

    Types of Goods

    • Economic goods are goods/ services that have a degree of scarcity and therefore an opportunity cost.
    • Free goods are goods/ services that are not scarce and are available in abundance.

    Factors of Production

    • Resources or factors of production are used to make goods and services.
    • There are four factors of production:
      • Land - natural resources used in production such as land itself.
      • Labor - human effort involved in the production of goods/ services.
      • Capital - man-made resources that are used to help produce goods/ services, such as machinery and equipment.
      • Enterprise - the skills and willingness to take risks required to organize productive activities.
      • Entrepreneurs organize and combine resources in firms to produce goods and services
    • Durable consumer goods last a long while such as furniture.
    • Non-durable consumer goods do not last a long while such as food.

    Geographical Mobility of Labor

    • This refers to the ability of a person to relocate from one area to another due to employment purposes.
    • Many workers are unwilling to relocate due to:
      • Family ties and other commitments.
      • The cost of living in a new area.

    Occupational Mobility of Labor

    • This refers to the ease with which a person can change between jobs.
    • This depends on factors such as:
      • The cost of retraining.
      • The length of training for different roles or industries.
      • The educational requirements of different professions.

    Changes in the Quantity or Quality of Factors of Production

    • Changes in the quantity or quality of factors of production can lead to changes in their cost.
    • Changes in factors of production include:
      • Changes in labor cost.
      • Changes in raw material cost.
      • Government policies such as taxes and subsidies.
      • New technology.
      • Migration of labor.
      • Improved education and healthcare.
      • Weather conditions ( especially for agricultural products).

    Opportunity Cost

    • Opportunity cost is the cost of choosing between alternative uses of resources.
    • Choosing one use will always mean giving up the opportunity to use resources in another way, and the loss of goods & services they might have produced instead.
    • The problem of resource allocation is choosing how best to use limited resources to satisfy as many needs and wants as possible and maximize economic welfare.
    • Economics aims to find the most efficient resource allocation.
    • Example - If a person invests 10,000inastock,theycouldhaveearnedinterestbyleaving10,000 in a stock, they could have earned interest by leaving 10,000inastock,theycouldhaveearnedinterestbyleaving10,000 in a bank account instead.
    • The opportunity cost of a decision to invest in stock is the value of the potential interest.
    • Example - a city decides to build a hospital on vacant land.
    • They could have built a school or a sports centre instead.
    • The opportunity cost of building a hospital is the value of the school or the sports centre.

    Microeconomics

    • Focuses on the behavior of individual economic agents, such as consumers, firms, and markets.
    • Key Concepts:
      • Supply and Demand: The interaction of supply and demand determines the equilibrium price and quantity of goods and services in a market.
      • Elasticity: Measures how responsive the quantity demanded or supplied is to changes in price or other factors.
      • Consumer Behavior: Examines how individuals make choices about what to buy, based on factors like income, preferences, and price.
      • Production and Costs: Analyzes how firms determine the optimal level of output and allocate resources to minimize production costs.
      • Market Structures: Examines how different market structures (perfect competition, monopolistic competition, oligopoly, monopoly) affect pricing, output, and efficiency.

    Macroeconomics

    • Focuses on the economy as a whole, examining factors like national output, employment, and inflation.
    • Key Concepts:
      • Gross Domestic Product (GDP): Measures the total market value of all final goods and services produced within a country's borders during a specific period.
      • Unemployment: Reflects the number of people actively seeking employment but unable to find it.
      • Inflation: Represents the rate at which the general price level of goods and services rises over time.
      • Monetary Policy: Central banks use monetary policy tools, such as interest rate adjustments and controlling the money supply, to influence economic activity.
      • Fiscal Policy: Government spending and taxation policies are used to influence economic conditions, such as stimulating growth or reducing budget deficits.

    Economic Theory

    • Provides frameworks and models to understand economic phenomena, explaining causes and effects of economic events.
    • Key Theories:
      • Classical Economics: Emphasizes free markets, minimal government intervention, and the self-regulating nature of the economy.
      • Keynesian Economics: Highlights the role of government spending and demand management in stabilizing the economy during recessions or economic downturns.
      • Supply-Side Economics: Focuses on policies to stimulate economic growth by encouraging production and investment through tax cuts and deregulation.
      • New Classical Economics: Emphasizes rational expectations, market efficiency, and the idea that individuals and firms make decisions based on all available information.
      • Behavioral Economics: Integrates psychology into economic models, considering how cognitive biases and psychological factors influence decision-making.

    International Trade

    • Deals with the exchange of goods and services between countries, focusing on the benefits and challenges of globalization.
    • Key Concepts:
      • Comparative Advantage: A nation specializes in producing goods and services it can produce more efficiently than other countries, leading to overall gains from trade.
      • Trade Barriers: Government policies like tariffs, quotas, and regulations that restrict international trade, often intended to protect domestic industries.
      • Balance of Trade: Represents the difference between a country's exports and imports. A trade surplus indicates more exports than imports, while a trade deficit suggests the opposite.
      • Currency Exchange: Exchange rates determine the value of one currency in terms of another, affecting international transactions and trade flows.
      • Globalization: Refers to the increasing interconnectedness of economies and societies worldwide, driven by trade, investment, and technological advancements.

    Behavioural Economics

    • Examines how psychological factors and cognitive biases influence economic decisions, departing from the rational choice framework assumed in traditional economics.
    • Key Concepts:
      • Heuristics: Mental shortcuts used to simplify decision-making, which can lead to biases or errors in judgment.
      • Prospect Theory: Describes how individuals make choices under uncertainty, where losses are weighed more heavily than gains.
      • Loss Aversion: The tendency to feel the pain of a loss more strongly than the pleasure of an equivalent gain.
      • Nudge Theory: Uses subtle interventions and changes in the environment to encourage desired behavior, guiding individuals towards specific choices.
      • Social Preferences: Acknowledges that social norms, fairness considerations, and group belonging influence economic behavior beyond individual self-interest.

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    Description

    Explore the foundational concepts of economics, including the basic economic problem of scarcity and the different types of goods. Delve into the four factors of production: land, labor, capital, and enterprise, and understand their roles in the economy.

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