The Economic Problem

Topics: Economics, Economics terminology, Goods Pages: 2 (383 words) Published: November 1, 2013
Key terms:

Definition:
Opportunity cost
The cost of missing out on the next best alternative.

Economic goods
Goods that are scarce and therefore have an opportunity cost.

Free goods
Goods that have no opportunity cost, e.g. Air

Factor market
The market for the factors of production that make other goods and services such as labour or raw materials.

Free market economy
One in which there is very limited government involvement in providing goods and services.

Division of labour
Dividing one task into many little ones.

Value judgements
Opinions or statements which depend on the views of the individual

Normative statements
Opinions that cannot be proven or tested.

Positive statements
Statements that can be tested against real world data.

Factors of Production:
1. Land [Resources]
2. Labour [Workers ]
3. Capital [Money or Machinery]
4. Enterprise [Entrepreneurs]
Economic Objectives:
Government/ State [Want to give out grants to new businesses as they will create more jobs and pay a substainal amount of tax which will go into the economy] Consumers [They want good quality and the product/service to be at a good price because of the limited amount of income] Workers [They want higher wages and better working conditions, and job security. Also some workers will accept a lower pay if other benefits emerge, eg. Healthcare. Firms/ Business [Their main objective is to maximase profits. Also to spend less on raw materials] Prices & Profits have three key functions:

1. Incentive function
2. Rationing function
3. Signalling function
When prices rise consumers tend to ration (cut down) their demand. When prices fall consumers extend their demand (an end to rationing). The Production Possibility Boundary (PPB)

The key problem in economics is that we have to make choices, because there are not enough resources to provide everything we want. The shortage is known as scarcity. However, if we chose to use the...
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