11 Questions
What is the fundamental reason for the existence of economic problems?
The scarcity of productive resources
What is the primary role of entrepreneurs in a firm?
To organize and combine resources to produce goods and services
Which of the following is an example of a durable consumer good?
Furniture
What is the fourth factor of production, in addition to land, labor, and capital?
Enterprise
What do consumers want and need, but cannot fully satisfy due to the scarcity of resources?
Goods and services and unlimited wants
What is the main goal of economics in terms of resource allocation?
To find the most efficient way to use limited resources to satisfy as many needs and wants as possible
What is shown on a Production Possibility Frontier (PPF)?
The maximum combinations of goods and services that can be produced by an economy in each period of time
What is the opportunity cost of a decision?
The value of the benefits forgone of the next best thing that could have been done
What is the role of producers in a market economic system?
Producers use market price to determine what is profitable to produce
What is the main difference between a market economic system and a mixed economic system?
The presence of a private sector versus a public sector
What can a government do in a mixed economic system to correct market failures?
Introduce laws and regulations to control harmful activities
Study Notes
The Basic Economic Problem
- The fundamental economic problem is the scarcity of resources, which means there are too few resources to produce all the goods and services that consumers need and want.
- Unlimited wants and needs are faced with finite resources, leading to scarcity.
Factors of Production
- Resources or factors of production are used to make goods and services.
- The four main factors of production are:
- Land: natural resources used in production (e.g., land).
- Labour: human effort used in production of goods and services (e.g., workers).
- Capital: man-made resources used to produce goods and services (e.g., tractor).
- Enterprise: skills and willingness to take risks required to organize productive activities.
Opportunity Cost
- Opportunity cost is the cost of choosing between alternative uses of resources.
- Choosing one use means giving up the opportunity to use resources in another way, resulting in a loss of goods and services that could have been produced.
- The problem of resource allocation is choosing how 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.
Production Possibility Curves and Choice
- Opportunity cost can be shown using a production possibility frontier (PPF).
- A PPF shows the maximum combinations of goods and services that can be produced by an economy in each period with its limited resources.
- A PPF shows all the combinations of possibilities, involving two goods or options.
Allocation of Resources
- Market prices determine what is profitable for producers.
- Rising consumer demand for a product will tend to increase its price.
Market and Mixed Economic Systems
- Market Economic System:
- Has a private sector only.
- Produces a wide variety of goods and services if it is profitable to do so.
- Only provides goods and services to consumers who are willing and able to pay.
- Mixed Economic System:
- Has a private sector and a public sector.
- A government can try to correct market failures.
- Can allocate scarce resources to provide goods and services that people need.
- Can introduce laws and regulations to control harmful activities.
Understand the fundamental problem of economics: scarcity of resources and unlimited wants. Learn about the factors of production, including land, labor, and capital. Test your knowledge of the basics of economics!
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