1.1.3

• The basic economic problem

  The main purpose of economic activity is the production of goods and services to satisfy the needs and wants of consumers.

  The basic economic problem is about scarcity and choice i.e. economics is about coming up with ways to meet infinite wants when faced with finite resources.
• Scarcity

  We are always uncovering new wants and needs. Because of scarcity/ finite resources, all consumers, businesses and governments must make choices.

  E.g. 5m people travel into London each day, they make decisions about when to travel and whether to use the bus, tube, walk or cycle or work from home. Their time and money is scarce.
• Factors of production

  Economics is concerned with converting inputs to outputs, in other words, the resources that we need to use to be able to produce the goods and services that we want.

  • Capital
  • Enterprise
  • Land
  • Labour
• What are capital goods?

  These are goods that are used to make consumer goods and services. Capital inputs include plant and machinery, hardware, software, new factories and other buildings. Capital also includes working capital. Capital is often used to replace labour, known as 'capital-labour substitution'.
• Renewable resources

  Renewables are replaceable if the rate of extract is less than the natural rate at which a resource renews

  Examples of renewable resources are solar energy, tidal power, oxygen, biomass, fish stocks and forestry
• Non-renewable resources

  Non-renewable resources are finite in supply

  With crude oil, coal, natural gas and other fossil fuels, no mechanisms exist at present to replenish them at a rate that is faster than the rate of consumption

  The rate of extraction of finite resources depends in part on the current market price
• Opportunity cost

  Opportunity cost is the cost of the alternative that is given up/ forgone, when a choice is made