The Economic Problem and Economic Assumptions

A basic requirement for human survival is known as a what? Want Desire Need Choice Anything else that people choose to have are known as what? Wants Desires Preferred options Needs The Problem of Scarcity All countries have a problem of scarcity, resources that they have lots of and resources they do not have enough of.Group the following countries according to the type of resource they are likely to not have much of. Water Saudi Arabia Spain People Japan Greenland Animals Singapore Hong Kong The Basic Economic Problem Match each element of the basic economic problem with its correct exemplification: What to produce? For example should you build more schools or hospitals, expand the army, build more houses, construct more roads etc.? How to produce? Which production methods should you use? How should you organise the factors of production? Labour-intensive or capital-intensive? For whom to produce? How should produced goods be distributed? Should everyone get exactly the same quantities or should some receive more than others? The benefits lost of the next best alternative (the option you didn’t choose) is known as what? Choice theory Trade off Opportunity cost Unlucky outcome When making choices, you have to give up something (the option you do not choose) – this is known as a what? Opportunity cost Choice theory Unlucky outcome Trade off Choices If you have to choose between buying a drink or a packet of crisps at the shop, this choice is a trade-off.If you choose the drink (with the crisps being the next best alternative) you will lose the satisfaction of having your hunger pangs stopped.This is the opportunity cost, because stopping your hunger pang would be a benefit of eating the crisps.If you have to choose between doing homework, going to sleep or seeing friends, you may choose to see friends.If going to sleep was the next best alternative, the opportunity cost will be feeling rested and ready for the day after an good night’s sleep. Production Possibility Curve Click on each blue dot, then copy and paste in one of the following:Impossible to produceUnderutilised resourcesMaximum level of output Maximum level of output Underutilised resources Impossible to produce Production Possibility Curves Over Time / Economic Growth Over time an economy would expect to raise production of all goods, because over time resources would be used more efficiently. E.g. using new, more efficient production methods or finding new resources which enable them to produce more.If countries produce more the PPC will shift outwards and they will now be able to enjoy combinations of goods not previously attainable.Positive economic growth is a long-term expansion of the productive potential of the economy, whereas, negative economic growth means the economy has gotten smaller.Causes of positive economic growthGrowth in physical capital stock (machinery etc.), leading to a rise in capital per employee (capital deepening).Growth in the size of the active labour force available for production.Growth in the quality of labour (human capital).Technological progress and innovation driving productivity improvements i.e. higher GDP per hour worked.Institutions - including maintaining the rule of law, stable democracy, macro-economic stability.Rising demand for goods and services - either led by domestic demand or from external trade.Causes of negative economic growthChanges in the real exchange rate affecting competitiveness.Cyclical fluctuations in national output and external trade.Financial instability e.g. unsustainable credit boom and fall in savings.Volatility in world prices for essential imports and key exports.Political instability / military conflicts.Natural disasters and other external supply shocks.Unexpected breakthroughs in the state of technology. Underlying Assumptions Economists can’t study in a laboratory like scientists instead they make ‘models’ of the world, based on a number of assumptions. One of which is that people behave in a rational way (i.e. they act based on clear thought and reason):1) Consumers aim to maximise their benefit They have a limited income and they allocate money in a way that improves gives them the highest total satisfaction. So a consumer looking to buy exactly the same product from three different suppliers will choose the cheapest option, this is a rational choice2) Businesses aim to maximise their profit. If a business owner can buy some raw materials from three different suppliers, the owner will always buy the cheapest available, as long as the quality is the same. To pay more money than you needed to would be classed as irrational. When setting a price for their product a business will always seek to set the highest price that the market will be able to stand, thereby maximising revenues and profits. Reasons Why Benefits and Profits are not Maximised Match each reason as to why consumers do not maximise their benefit and producers do not maximise their profits with its correct exemplification: Consumers are not always good at calculating their benefits Decisions are made based on incomplete information. They might have underestimated or overestimated the possible levels of satisfaction Consumers have habits that are hard to give up They lack self control and seek immediate satisfaction. Sometimes they stay loyal to a brand, even when others represent better value Consumers sometimes copy others’ behaviour They are influenced by their social networks and copy their family and friends Owners may have managers that revenue maximise or sales maximise E.g. a sales manager on commission for every product he sells may lower the price to attract buyers who buy in bulk, thereby maximising sales but not maximising profits Producers may prioritise caring for customers Providing excellent customer service might require additional training, this extra cost will mean that profits are not maximised Producers may complete charitable work social enterprises Economists cannot assume that these businesses seek to maximise their profits, since they have other aims Wordsearch! To mark a word click its first letter then click its last. Words placed forward, down and diagonally. ASSUMPTION KNOWLEDGE INFINITE SCARCITY MAXIMISE ECONOMY BENEFIT PROBLEM PROFIT FINITE BRAND NEED WHAT WANT WHO