The Basic Economic Problem

The Basic Economic Problem

• The resources available to an economy are known as the factors of production
• Factors of production are the mean by which an economy produces a whole range of goods and services to meet the needs of its population
• The four factors of production are:
  • Land – Natural resources.
    • g. oil, rivers, minerals. Also can be attractive touristic things like the sun, sea, sand, etc.
  • Labour – The human resource in an economy.
    • Quantity and quality of an economy’s labour are important factors
  • Capital – A form of physical resource that covers anything that’s regarded as a man-made aid for production.
    • Capital is combined with land and labour to produce goods that are required by the population.
    • g. factories, offices, machinery, IT, transport, roads, electricity, etc.
  • Entrepreneurship – A particular form of human capital.
    • Firstly, it refers to enterprise whereby the other factors of production are organized to produce goods and services
    • It also refers to entrepreneurs and people willing to take risks

• The quality of an economy is based on factor endowments – Poor factor endowments, poor economy
• Factor endowment alone isn’t the only ‘factor’ the determines the quality of an economy

• The factors of production are scarce, but consumers’ wants are unlimited
• We all want things, whether it be food and shelter or a new TV
• Wants are different and are of greater or less priority for everyone – scale of preferences
• This means that we have to choose what we want based on what’s available – due to scarcity (we can’t have it all!)
• When making choices, economists consider possible alternatives – opportunity cost