The economic problem is the allocation of a nation’s scarce resources between competing uses that represent infinite wants.
Demand for resources is greater than their supply.
Decisions have to be made about how to allocate a nation’s scarce resources – the amount of resources available when supply is limited.
To overcome the economic problem, important decisions have to be made about what to produce and how to produce.
Governments can issue pollution permits to a company, which give businesses the right to discharge a certain amount of polluting material, say 1 tonne per year.
Many countries around the world have laws designed to protect the environment.
Pollution is difficult to measure.
Pressure has grown on governments in recent years to pass more legislation to protect the environment due to growing concerns of global warming.
Resources often have a number of alternative uses; as a result, people have to make a choice about which way to use them.
Individuals, producers and governments face this choice.
Individuals have to choose how to spend their limited budgets.
Producers may have to choose between spending $100,000 on advertising, training its workforce or buying a new machine.
A government may have to decide whether to spend $5000 million on building new hospitals, increasing welfare benefits or building a new motorway.
Opportunity cost is the cost of the next best alternative forgone when making a choice.
Anita chose to spend her Rs5000 on the most preferred item in her list, which was the meal out with her friends.
If a consumer is faced with buying a product from three different suppliers at the same price, they will buy the best quality product.
If a business owner can buy some raw materials from three different suppliers, they will always buy the cheapest available as long as the quality is the same.
Businesses aim to maximise their profit by making decisions that have the best financial results.
Consumers may not maximise their benefit because they are not good at calculating their benefits.
Consumers may not maximise their benefit because they are influenced by the behaviour of others.
Economists assume that consumers will always choose the cheapest available product from three different suppliers, as long as the quality is the same.
When setting a price for a product, a business owner will always choose the highest price that the market can stand.
Consumers aim to maximise their benefit by spending their money on items that provide the most satisfaction.
Consumers may not maximise their benefit because they have habits that are hard to give up.
When making choices, individuals, firms and governments will face a cost once their choice has been made, this is called the opportunity cost.
A production possibility curve is a line that shows the different combinations of two goods an economy can produce if all resources are used up.
A PPC shows the different combinations of two goods that can be produced if all resources in a country are fully used.
A PPC shows the maximum quantities of goods that can be produced.
A PPC assumes that the country can produce consumer goods or capital goods.
The private sector is responsible for providing the everyday goods and services bought by people.
In some mixed economies, the state also makes provision for people who cannot work due to illness or disability, for example.
The government can use legislation to prevent businesses from dominating markets.
State money can be used to provide public goods and merit goods.
Market failure can occur due to externalities, lack of competition, missing markets, lack of information, factor immobility, or a combination of these factors.
To overcome the problem of poor information, the government can help by passing legislation forcing firms to provide more information about products.
Most public sector goods are provided free to everyone and paid for from taxes.
Owning through the threat of market failure, the government often has to intervene in markets.
The government may be able to help to make some factors more mobile, such as retraining workers when their previous jobs become redundant.
A system of financial benefits exists to make sure that people have enough money to survive.
Market failure is where markets lead to inefficiency.