1.1 Economic Problem

• An economic good is one with a price because they are scarce in relative terms
• Free Goods are ones with no price not scarce - e.g. oxygen
• Basic Economic problem is how to allocate Economic Goods so you need to answer 3 questions:

  What goods to produce? - consumer decides

  How to produce them? - Capital intensive or Labour intensive

  Who will get them? - People with money
• Basic Economic Problem is summed up by realising that there are LIMITED resources but unlimited wants can't be satisfied this causes a need for choice. As choices are made so some wants cannot be satisfied which lead to what is called on opportunity cost.
• A normative statement is one that expresses an opinion.
• A positive statement is one that is based on facts.
• Factors of production

  • Land - Any natural resource - Rewarded with rent
  • Labour - People - Rewarded with Wages
  • Capital - Machines, Factories - Rewarded with Interest 
  • Social Capital - schools, Hospital
  • Enterprise - The boss - Rewarded with Profit
• Households provide the workforce for businesses/firms. Firms employ us in order to use our efforts to produce goods and services.
• As users/consumers of goods and services. We buy things, e.g. a new car or a packet of crisps, to use them. We call this process 'consuming'.
• Firms provide the goods and services and want to sell as many of the goods/services at the highest possible price. They supply the item. They are producers of goods and services.
• The government has other tools with which it can influence the economy. Often these are employed to improve society.
• Normative statements - Subjective statements based on value judgements and opinions, cannot be proven or disproven.
• Positive statements - Objective statements which can be tested with factual evidence to be proven or disproven
• Rationalisation - Decision making that leads to economic agents maximising their utility.