The Economic Problem
What are unlimited and what are limited?
Wants and needs are unlimited, resources are limited
What is a market?
A place where goods and services are sold
What are the two main groups involved in the basic circular flow of income model?
Households and businesses
What is the difference between a consumer and a producer?
Consumers purchase and use goods and services. Producers create and sell goods and services
What do we call it when resources are limited?
Scarcity
Explain the difference between supply and demand
Demand is the quantity of a good or service consumers are willing and able to buy. Supply is the quantity producers are willing and able to sell
Explain the relationship between households and businesses in the circular flow model
Households provide businesses with factors of production, such as labour. Businesses pay households income, which households use to purchase goods and services from businesses
Identify and explain the four factors of production
Land = Natural resources used in production
Labour = Human effort and work
Capital = Equipment, machinery and buildings used to produce goods and services.
Enterprise = The ability to organise resources, make business decisions and take risks
A government has a limited budget and must choose between building a new hospital or improving local roads. They choose a new hospital. What is the opportunity cost?
Improving local roads
Why is it important for businesses to understand what consumers want before deciding what products to sell?
Understanding consumer preferences helps businesses sell products people actually want, attract customers, and make a profit
Explain what might happen to businesses if households suddenly reduced their spending.
Businesses would receive less revenue, potentially leading to reduced production, lower profits and fewer jobs
A bakery produces cakes. Identify one example of land, labour, capital and enterprise that the bakery uses
Full marks means must be at least one example for each factor
What is opportunity cost?
The next best thing/something you give up/what a choice costs you
A popular new pair of sneakers is released, and many consumers want to buy them. What is likely to happen to demand and price?
Demand increases because more consumers want the sneakers. If supply does not increase, the price is likely to rise
What is interdependence?
Interdependence refers to how households, businesses and the government rely on each other to keep the economy operating
Imagine you are starting a new business. Which of the four factors of production do you think would be most important to your success? Justify your answer
For full points, need a factor of production PLUS an explanation
Full marks needs two options, choice of one, identification of opportunity cost, and explanation of why cannot choose both
A drought causes farmers to produce fewer vegetables. Explain how this reduction in supply might affect prices for consumers.
Supply decreases because fewer vegetables are available. This can cause prices to increase because consumers are competing for fewer products
Why is it important for money to continue circulating between households and businesses for an economy to function effectively?
Spending by households provides businesses with revenue. Businesses then use this money to pay workers and purchase resources, allowing money to continue circulating through the economy
Explain why a business needs to combine different factors of production to successfully produce goods and services
Businesses need all the factors. Without these factors working together, goods and services cannot be produced effectively.