The Economic Problem
Overview
A national government has a health budget of $2 billion. It could spend every dollar on new hospitals, or it could spend it on schools, or on both in some combination, but it cannot buy unlimited amounts of everything it wants. This single, inescapable dilemma, wanting more than you can have, sits underneath every decision made by every household, business and government on the planet.
In this lesson you will meet the economic problem in its sharpest form: scarcity forces choice, and every choice carries an opportunity cost. You will learn to read a production possibility curve, a single diagram that captures scarcity, choice, efficiency, unemployment and economic growth all at once, and you will look at what actually drives an economy's productive capacity up or down over time.
Objectives
- The problem of scarcity - where there are unlimited wants and finite resources, leading to the need to make choices
- Opportunity cost and its effect on economic agents (consumers, producers and government)
- The use of diagrams to show production possibility curve
- Production possibility curve diagram should be used to show the maximum productive potential of an economy, fully employed or unemployed resources, opportunity cost, positive or negative economic growth that shifts the production possibility frontier outwards and inwards, and possible and unobtainable production
- Possible causes of positive or negative economic growth
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Flashcards
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Lesson Note
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Lesson Evaluation
Congratulations on completing the lesson on The Economic Problem. Now that youve explored the key concepts and ideas, its time to put your knowledge to the test. This section offers a variety of practice questions designed to reinforce your understanding and help you gauge your grasp of the material.
You will encounter a mix of question types, including multiple-choice questions, short answer questions, and essay questions. Each question is thoughtfully crafted to assess different aspects of your knowledge and critical thinking skills.
Use this evaluation section as an opportunity to reinforce your understanding of the topic and to identify any areas where you may need additional study. Don't be discouraged by any challenges you encounter; instead, view them as opportunities for growth and improvement.
- The economic problem arises because: A) Governments set prices too high B) Wants are unlimited but resources are finite C) Businesses always make a loss D) Consumers never make choices Answer: B
- A point lying inside a production possibility curve shows: A) An unobtainable combination of output B) Full and efficient use of resources C) Under-used or unemployed resources D) Negative economic growth Answer: C
- Which of the following would most likely cause an outward shift of a country's production possibility curve? A) A rise in unemployment B) The destruction of factories in a flood C) A significant improvement in production technology D) A fall in consumer spending Answer: C
- A farmer chooses to plant maize instead of beans on a plot of land. The opportunity cost of this decision is: A) The cost of the maize seeds B) The revenue that would have been earned from beans C) The total revenue from maize D) The cost of fertiliser used on the maize Answer: B
- The production possibility curve is typically drawn bowed outward from the origin because: A) Resources are perfect substitutes for each other B) Opportunity cost falls as more of one good is produced C) Resources are not equally suited to producing both goods, so opportunity cost rises D) Governments always intervene in markets Answer: C
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