Micro Topic 1: The Basic Economic Problem

What is the basic economic problem?

The basic economic problem is that resources are scarce, while human wants are unlimited, leading to the need for choices and trade-offs.

What does scarcity mean in economics?

Scarcity means there are limited resources to meet the unlimited wants and needs of people.

What is opportunity cost?

Opportunity cost is the value of the next best alternative that is forgone when making a decision.

Q: How does opportunity cost affect decision-making?

A: It forces individuals, businesses, and governments to make trade-offs, as choosing one option means forgoing another.

Q: What are the factors of production?

A: The factors of production are land, labor, capital, and enterprise, which are used to produce goods and services.

Q: What is the role of land in the factors of production?

A: Land refers to natural resources used in the production of goods and services, such as minerals, water, and agricultural land.

Q: What is the role of labor in the factors of production?

A: Labor refers to the human effort used in production, including physical and mental work.

Q: What is the role of capital in the factors of production?

A: Capital refers to machinery, tools, and infrastructure used in the production process.

Q: What is the role of enterprise in the factors of production?

A: Enterprise refers to the entrepreneurial ability to organize the other factors of production and take risks to produce goods and services.

Q: What are the three basic questions every economy must answer?

• What to produce?

• How to produce?

• For whom to produce?

Q: What does “what to produce?” refer to in the basic economic problem?

A: It refers to deciding which goods and services should be produced with the limited resources available.

Q: What does “how to produce?” refer to in the basic economic problem?

A: It refers to deciding the methods and processes used to produce goods and services, considering the use of labor, capital, and technology.

Q: What does “for whom to produce?” refer to in the basic economic problem?

A: It refers to deciding which individuals or groups in society will receive the produced goods and services.

Q: What is a command economy?

A: A command economy is where the government makes all the decisions about resource allocation, what to produce, and for whom.

Q: What is a market economy?

A: A market economy is where decisions about production and consumption are made by individuals and firms based on supply and demand.

Q: What is a mixed economy?

A: A mixed economy combines elements of both market and command economies, with some government intervention and some private sector decision-making.

Q: How does economic efficiency relate to the basic economic problem?

A: Economic efficiency involves using resources in a way that maximizes output and minimizes waste, helping to address the problem of scarcity.

Q: What is sustainability in the context of the basic economic problem?

A: Sustainability refers to meeting current needs without compromising the ability of future generations to meet their needs, balancing resource use.