The economic problem - 1.1.1

• Economic activity

  The purpose of economic activity is to satisfy the wants and needs of society
• The economic problem 


  Occurs when there are finite resources available to supply infinite or unlimited wants

  Scarcity
• Economic agents

  People/consumers/customers

  Organisations/firms/businesses

  Governments
• The economic problem

  Economic agents have unlimited wants and needs, but there aren't enough resources to supply all these wants, creating scarcity
• Opportunity cost - definition

  When choices are made there is always a cost of the alternative we give up

  The opportunity is the value of the second best alternative that cannot now be chosen

  E.g. the government has to choose to spend public funding on healthcare OR education
• Trade off - definition

  When you choose one thing which causes you to give up, or sacrifice another

  Having more of one thing potentially results in having less of another

  Trade offs are valued based on their opportunity cost, the value of what is lost when choosing one thing or another
• Trade off - examples

  Less market research (lower cost) -> less successful new product launch (lower sales)

  Higher quality standards to build reputation -> more quality control and assurance costs

  More advertising online -> reduced advertising on TV

  Choose lower risk investment -> gain lower rewards
• Economic goods

  Most goods are scarce and have an opportunity cost

  Scarce resources are limited in supply and therefore choices need to be made about their use

  Anything that costs money
• Free goods

  Some goods have no opportunity cost e.g. air, sunlight, wind, rain
• Renewable resources

  Come from a source that won't run out

  Natural and self-replenishing, usually have low or zero carbon footprint e.g. trees, wind power, solar power, etc
• Non-renewable

  Come from sources that will run out or will be replenished in our lifetimes, or many lifetimes e.g. fossil fuels like coal, oil and gas
• Sustainable resources

  Natural resources that are renewable and can be replenished at the same rate, or faster than they are being consumed e.g. solar energy, hydropower, etc