The economic problem

• What is the basic problem in economics?

  Scarcity - people have unlimited wants but resources are finite and limited

  • relative concept as resources may not be technically scarce but scarce relative to the demand placed upon them
• How to do economies try to solve the problem

  By working out:

  • what to produce
  • how to produce
  • whom to produce to
• What is a renewable resource?

  A resource that can be replenished or replaced naturally over time on a level equal to consumption.

  • E.g. solar, hydro, wind, oxygen, fish**
  • as long as rate of consumption is less than or equal to the rate of replenishment, stock will not decrease
• What is a non-renewable resources?

  A resource that cannot readily be replenished naturally on a level equal to consumption

  • e.g. fossil fuels, oil, coal
• Allocating finite resources

  The same resources cannot be used to produce a different goods at the same time so decisions have to be made on how to use them > this leads to opportunity cost.
• What is opportunity cost?

  Is the cost of one thing/ decision measured by/ in terms of the next best alternative that has been given up/forgone.
• How will consumer make choices on how to use their limited income?

  Based on what gives them the greatest level of satisfaaction
• What is utility in economics?

  Refers to the satisfaction or benefit that individuals derive from consuming goods and services.
• What is diminishing marginal utility?

  Decreasing satisfaction from consuming additional units of a good or service.
• How do producers choose to allocate limited resources?

  Based on profit
• What is profit?

  Financial gain or benefit obtained from a business activity.
• How does government choose to spend limited tax revenue?

  What maximises social welfare
• What are the four factors of production?

  • Land
  • Labour
  • Capital
  • Enterprise
• What is Land as a factor of production?

  Natural resources and physical space used in the production of goods and services.
• What is labour as a factor of production?

  Human effort in the production process- physical/mental and paid or unpaid.
• What is capital as a factor of production?

  Man made resources used in producing goods/services.

  • Value of a worker is their human capital
• What is enterprise as a factor of production?

  Willingness and ability to take risks of combining the other three factors in order to make product/service