The Basic Economic Problem

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Distinguish between economic goods and free goods

A free good is a good with zero opportunity cost. This means it can be produced by society in as much quantities as needed with little or zero effort. An example would be of oxygen and water. An economic good is a good or service that has a benefit (utility) to society. Also economic goods have a degree of scarcity and therefore an opportunity cost. Most goods fall into this category.

Distinguish between normative and positive statements

A positive statement is a statement about facts. e.g. government consulting economist to discover effects of higher tax on consumption of cigarettes and government revenues. A normative statement is about what is ought to be Statement becomes normative when it has a value judgment added to it. e.g. whether they should raise tax on cigarettes- asking for valued judgment

Explain what is meant by 'scarcity'

Scarcity is a situation that arises because people have an unlimited amount of wants in the face of a limited amount of resources. It forces people to make choices- everyone needs to priorities the consumption of whatever commodities they need or would like to have as they can't satisfy everything that they want as well as taking in term long term implications of choices. Government need to make choices between alternative uses, e.g. clearing large areas of rainforest.

Explain what is meant by the basic 'economic problem'

The Basic Economic problem is an unlimited amount of wants but a limited amount of resources, therefore choices must be made. This means that there is a limit of what can be produced regardless of what a person wants due to the limited amount of resources. Scarcity is not the same as ther

What are the three economic questions

What to produce? How to produce? For whom to produce?

Explain the role of economic agents: Government Firms Households

Household make the choices about their expenditure on what they consume in consideration to their supply of labour. Firms are important because they produce the goods that are consumed. Firms make choices of deciding what is produces and the technique of production. Prices they sell at are important in economic analysis

Distinguish between 'needs' and 'wants'

Needs would be defined as goods or services that are required. This would include the needs for food, clothing, shelter and health care. Wants are goods or services that are not necessary but that we desire or wish for, e.g. iPad.

Explain the rewards to the factors of production.

The rewards to labour is in the form of wages and salaries, whereas profits are for capital services and rent for lands.

Explain the nature and role of the different factors of production as economic resources

There are four factors of production: Labour - Human resource and key input into production with many different types of levels and skills. Capital - Land - Entrepreneurship -


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