9708 · 1.1
Scarcity, choice and opportunity cost flashcards
Revision flashcards for Cambridge 9708 Scarcity, choice and opportunity cost (syllabus 1.1). Flip, recall, then mark a real past-paper question.
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What is the basic economic problem?
The problem of scarcity, which arises because human wants are infinite, but the resources (factors of production) available to satisfy these wants are finite.
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Define opportunity cost.
The value of the next best alternative that is forgone when an economic decision is made.
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List the four factors of production and their respective rewards.
Land (reward: rent), Labour (reward: wages), Capital (reward: interest), and Enterprise (reward: profit).
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Distinguish between an 'economic good' and a 'free good'.
An economic good is scarce and has an opportunity cost in its production (e.g., a car). A free good is not scarce and has a zero opportunity cost (e.g., air to breathe).
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Why does scarcity necessitate choice?
Because resources are limited, not all wants can be satisfied simultaneously. Therefore, economic agents must choose which wants to satisfy and which to leave unsatisfied, leading to trade-offs and opportunity costs.
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What are the three basic economic questions that arise from scarcity?
1. What to produce? (Which goods and services should be made?) 2. How to produce it? (What combination of factors of production should be used?) 3. For whom to produce it? (How should the goods and services be distributed among the population?)
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What is meant by 'rational economic decision-making'?
The assumption that economic agents (individuals, firms, governments) aim to maximise their own welfare (utility, profit, social welfare) by choosing an option only if its expected benefit is greater than its expected opportunity cost.
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What is the difference between 'capital' and 'financial capital' in economics?
'Capital' is a factor of production referring to man-made aids to production (e.g., machinery, factories). 'Financial capital' (money) is used to purchase these assets but is not a productive resource itself.