The basic economic problem

1.1 The nature of the economic problem

Nature of the economic problem

• Limited resources + unlimited wants = scarcity
• What / How / For whom to produce

Economic agents – households, firms & gov

Goods: physical items that can be produced, bought & sold

Services: non-physical items that can be provided & paid for by customers

Needs: essential goods/services for human survival

Wants: goods/wants that are unnecessary for survival but are human desires

Economic goods: limited in supply

Free goods: unlimited supply, no oppo cost in production & consumption

1.2 The factors of production

Factors of production

	Definition	Reward
Capital	all man-made goods used in production	interest
Enterprise	risk bearing and decision making function Eg Entrepreneurs take risks, develop new ideas & business opportunities & motivate workers	profit
Labour	all physical and mental effort of workers	wages
Land	natural resources	rent

Factor mobility: resources can be changed from one productive activity to another

Labour mobility

Geographical mobility	Occupational mobility
Willingness & ability of a person to move to different locations X coz family ties, cost of living	Ability of person to change between jobs Improved through training & upskilling

Causes of changes in quantity & quality of fop

1. Capital – investment in tech & equipment

– advances in tech ↑ efficiency

2. Enterprise – ↑ price but consumers still willing to pay, ↑ profit

– more & better business advices & support for entrepreneurs

3. Labour – ↑ wages persuade more employment

– ↑ education ↑ skills

4. Land – ↑ rent persuade more landowners to release land into production uses

1.3 Opportunity cost

Opportunity cost: cost of next best opportunity forgone when making decision

1.4 Production possibility curve diagrams (PPC)

Production possibility curve (PPC): shows max combination of goods/services which can be produced in economy

A – all resources are dedicated to production of bikes

B – all resources are dedicated to production of cars

A-D – use all resources to fullest, most efficient

E – outside curve → don’t have enough resources → unattainable

F – within curve → didn’t use resources to fullest → inefficient

C-D – ↑cars ↓bikes produced

Shifts of curves

Outwards e.g.↑ tech, education, healthcare ↑productive capacity

Inwards e.g.natural disasters, ↓ productive capacity

Exam questions