2281 · 1.1
The nature of the economic problem flashcards
Revision flashcards for Cambridge 2281 The nature of the economic problem (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) 2. How to produce? (Which combination of factors) 3. For whom to produce? (How will the output be distributed)
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What is meant by 'rational economic decision-making'?
The assumption that economic agents aim to maximise their welfare by comparing the benefits of an action with its opportunity cost. A rational choice is made if the benefit is greater than the cost.
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Why is 'money' not considered the economic resource 'capital'?
'Capital' refers to physical, man-made assets used in production (e.g., machinery, factories). 'Money' is a medium of exchange used to purchase capital, but it is not productive in itself.