Edexcel A Level Economics B 1.1 Questions & Correct Answers/ Graded A+

1.1.1 - The Economic Problem : The basic economic problem : Scarcity - unlimited wants and finite resources, so choices have to be made. Resources have to be used and distributed optimally. Scarcity refers to the shortage of resources in relation to the quantity of human wants. Scarcity Example : For example, if you only have £1 and you go to a shop, you can buy either the chocolate bar or the packet of crisps. The scarcity of the resource (the money) means a choice has to be made between the chocolate and the crisps. Opportunity Cost : Cost of the next best alternative use of money, time, or resources when one choice is made rather than another. In the £1 example, the opportunity cost of choosing the crisps is the chocolate bar. 2 Example of opportunity cost : If a car was bought for £15,000 and after 5 years the value depreciates by £5,000, the opportunity cost of keeping the car is £5,000 (which could have been gained by selling the car), regardless of the starting price. Who is opportunity cost important to and why? : Opportunity cost is important to economic agents, such as consumers, producers and governments. For example, producers might have to choose between hiring extra staff and investing in a new machine. The government might have to choose between spending more on the NHS and spending more on education. They cannot do both because of finite resources, so a choice has to be made for where resources are best spent. Trade-off : When looking at a balance between 2 choices, choosing more of one than the other. When producing goods, what does the economy need to consider? : What to produce: determined by what the consumer prefers. Consumers tell producers what they prefer by demanding goods and using their 'spending votes' and demanding certain goods. How to produce it: producers seek profits and aim to minimise production costs. Positive Statements 3 : Testable as factual or false, normally based on observation or evidence. Normative Statements : (AKA value judgements) Statements about the economy which depend on opinion and judgement. Often involve ideas on what should be done. 1.1.2 - Business Objective