1.1 Economic Problem

• What leads to the economic problem?

  The co-existence of scarce resources and infinite wants
• What are the three basic questions that Economics answers?

  What to produce? How to produce it? For whom to produce?
• Why is the economic problem considered basic?

  It applies in any context where economic decisions are made
• What are the limited resources in the economic problem?

  • Land
  • Labour
  • Capital
  • Entrepreneurs
• What does scarcity mean in economics?

  There are insufficient resources to meet wants
• What are 'economic goods' or 'scarce goods'?

  Products made using limited resources
• What is opportunity cost?

  The next best alternative forgone when an economic decision is made
• How does opportunity cost relate to economic decisions?

  It represents the true measure of cost in economic decisions
• What are 'free goods'?

  Goods that do not involve the use of scarce resources
• Why is sunlight considered a 'free good'?

  It does not involve the use of scarce resources
• What is the difference between economic goods and free goods?

  Economic goods require scarce resources, while free goods do not
• What is an example of an economic good?

  The Metro newspaper
• Why is healthcare considered an economic good?

  It is produced using scarce resources
• What are the four factors of production?

  1. Land: Natural resources
  2. Labour: Human effort both physical and mental used in the production of goods and services
  3. Capital: Man-made goods
  4. Enterprise: Risk-taking entrepreneurs that organise the other economic resources to facilitate production
• What is the reward for capital in factor payments?

  Interest
• What is the reward for enterprise in factor payments?

  Profit
• What is the reward for land in factor payments?

  Rent
• What is the reward for labour in factor payments?

  Wages
• What roles do economic agents play?

  • Households: Consumers of goods and services and providers of factors
  • Firms: Producers of goods and services and rewards the entrepreneurs with profit
  • Government: Regulates economic activity in an attempt to maximise social welfare And also imposes rules and regulations on consumers and prducers
• What do households seek to maximize as consumers?

  Utility from consuming goods and services
• What do firms seek to maximize?

  Profit from their activities
• What does the government seek to maximize?

  Social welfare of citizens