What is it?
The basic economic problem is the fact that RESOURCES are SCARCE (limited in supply) but WANTS are INFINITE (never ending). As a result of this, consumers, producers and the government have to make CHOICES about how to ALLOCATE scarce resources.
When we choice one thing, we often sacrifice or give-up something else. OPPORTUNITY COST is the highest valued alternative that we forego because scarce resources allocated elsewhere.
What are resources?
Resources are all the elements that go into the production of goods and service. Resources are often known as the
FACTORS OF PRODUCTION. There are 4 factors of production:
- LAND: All natural resources used in production, for example building land, oil, water, wheat, apples
- LABOUR: The human contribution to production- i.e. workers!
- CAPITAL: Capital refers to man-made equipment that is developed to aid the production of other goods and services. For example machines, computers, vehicles, shop fixtures, tills
- ENTERPRISE: The person(s) who has the initial business idea, raises the money and organises the other factors of production.
All economies face the basic economic problem. However, they may have different approaches to addressing it and
allocating resources. The approach they choose is known as an “economic system”
- PLANNED ECONOMY: All resources are owned by the PUBLIC SECTOR (the sector of the economy owned and controlled by the government). The public sector determines what goods and services are made and how. Goods and services are “shared out” amongst the population
- FREE-MARKET ECONOMY: All resources are owned by the PRIVATE SECTOR (the sector of the economy owned and controlled by private individuals). Goods and services are allocated via the MARKET MECHANISM, that is via demand and supply (prices)
There are pros and cons of planned and free-market economies:
|It is fair, everyone will get something
|There is no incentive to be efficient
|Theoretically, everyone can be given a
|There will be little choice for consumers
|The government can provide merit
|There may be corruption
|goods such as health and education, and
|Economic growth tends to be great low
|public goods such as defence
|because of the lack of profit incentives
|Free Market Economy
|There is competition- this is good for
|Inequality- there will be absolute and
|consumers (Low prices, better quality,
|relative poverty- poor people will be
|more choice, more innovation)
|reliant on charity and will have no choice
|There is more incentive to be efficient as
|Public and merit goods may not be
|low costs can allow low prices which
|provided/will be under
|may be important if markets are
|produced/consumed- eg not enough
|access to education and health care
|Environmental costs (eg pollution) is
|likely and there is no incentive to look at
|sustainable use of resources
In reality, most economies are mixed. This means there is a mixture of a public sector and a private sector owning and allocating the scarce resources. The UK has a mixed economy that is moving towards being more free market:
Public Sector: Education, Health, Police, Defence
Private Sector: Water, Electricity, Gas, Rail, Airlines, Supermarkets, Clothes stores
Examples of how the UK has become more free-market: Privatisation; de-regulation; contracting out; Free Schools and Academies