Central problem of economics

• Scarcity occurs when there is an excess of human wants (unlimited wants) over what can be produced
• Scarcity is a situation where resources are unable to meet people’s needs
• Economic resources:

  • Land: refers to renewable and non-renewable resources available for production, with the reward being "rent"
  • Labour: includes the physical and mental effort exerted by individuals in the production process, with the reward being "wages"
  • Capital: refers to man-made, physical resources used in the production of goods and services, with the reward being "interest"
  • Entrepreneurship: involves the overall responsibility and management of resources to combine other factors of production to provide goods or services, with the reward being "profits"
• Due to scarcity, people are compelled to make choices and choose alternative uses of limited resources to satisfy wants
• When a choice is made, it involves a trade-off known as Opportunity cost
• Opportunity cost refers to the value of the next-best alternative forgone as a result of a decision made, usually measured in terms of goods, services, or monetary value of what is given up
• Economic goods are those produced using scarce resources, limited in quantity and relative to demand
• Limited goods with demand lead to scarcity
• Producer goods and consumer goods are goods with tangible outputs
• Services are intangible outputs provided by individuals or firms
• Basic Economic Decisions:

  • What to produce? Economies need to decide on the most important goods and services desired by society
  • How to produce? The best possible or most efficient production method should be decided to incur the lowest cost and drive the highest output
  • How much to produce? Economies need to decide on the quantity of certain goods or services produced at a sweet spot
  • For whom to produce? Economies need to determine the distribution of goods and services among different individuals and groups in society, which can be controlled by the government or influential force of the purchasing power of individuals