The basic economic problem
What does scarcity mean?
limited resources but unlimited wants
What is meant by demand?
the quantity of a product consumers are willing and able to buy at a given price
What is a market economy?
A market economy is an economy where resources are allocated by demand and supply with little government intervention
Name the four main microeconomic decision makers
Consumers
Workers
Producers
Government
What is the business objective?
target a firm aims to achieve
Define opportunity cost and give one real-life example
The next best alternative given up when making a choice
Example: If you spend $10 on a movie instead of food, the opportunity cost is the food
Name two factors that could increase demand for a product
Higher income
Change in tastes
State two advantages of a market economy
Consumer choice
Competition improves quality
Efficiency
Innovation
Explain one role consumers play in an economy
Consumers influence demand by deciding what products to buy
Higher demand encourages firms to produce more
State two reasons why a firm may grow
Higher profits reinvested
Economies of scale
Increase market share
Diversification
Explain two reasons why resources are limited
Natural resources are finite
Labour or capital are limited in quantity
Explain what happens to price and quantity when supply decreases but demand stays the same
Supply curve shifts left
Price rises
Quantity falls
Explain two disadvantages of a market economy
Inequality of income
Public goods underprovided
Monopoly power
Unemployment
Explain how workers and trade unions can influence wages
Negotiate higher wages
Threaten strikes
Increase workers’ bargaining power
Explain two disadvantages of small firms
Limited access to finance
Cannot benefit from economies of scale
Vulnerable to competition
Less specialist staff
A government has $10 million and must choose between building a hospital or a highway. What would be the opportunity cost of choosing the hospital?
If the government chooses a hospital, the opportunity cost is the highway that could have been built instead
The price of coffee rises from $4 to $6, and quantity demanded falls from 100 units to 60 units
Calculate the price elasticity of demand
0.8
Why are public goods often underprovided in a market economy?
No profit incentive
Free rider problem
Firms cannot easily charge users
Why might governments intervene in markets?
Give three reasons
Correct market failure
Provide public goods
Reduce inequality
Protect consumers
Control pollution
A firm’s total cost is $5000
It produces 250 units
Calculate the average cost per unit
20
Discuss whether solving the economic problem is easier in a developed country than in a developing country
More capital and resources
Better infrastructure
Wants are also greater
Resources are still limited
Discuss whether a business should always raise prices if demand for its product is price inelastic
Quantity demanded falls by less than price rises
Revenue increases
Competitors may attract customers
Long-term reputation damage
Demand may become elastic
Discuss whether a mixed economy is better than a pure market economy
Government provides public goods
Reduces inequality
Controls monopolies
More efficiency
More consumer choice
Discuss whether consumers have more power than producers in deciding what gets produced.
Their demand determines production
Consumer preferences influence firms
Advertising can influence consumers
Limited competition can restrict choice
Discuss whether profit maximisation should always be the most important objective for a business
Rewards owners
Funds growth
Ensures survival
May reduce quality
Poor worker treatment
Other objectives may matter