1.1.3 The economic problem

• Wants are unlimited and resources are finite, so choices have to be made
• Resources have to be used and distributed optimally
• Opportunity cost


  The value of the next best alternative forgone
• Opportunity cost is important to economic agents, such as consumers, producers and governments
• Factors of production (CELL)

  • Capital
  • Entrepreneurship
  • Land
  • Labour
• Capital


  Physical: goods which can be used in the production process. Fixed: Machines; buildings. Working: finished or semi-finished consumer goods
• Entrepreneurship


  Managerial ability. The entrepreneur is someone who takes risks, innovates, and uses the factors of production
• Land


  Natural resources such as oil, coal, wheat, water. It can also be the physical space for fixed capital
• Labour


  Human capital, which is the workforce of the economy
• These factors of production are inputs, and they produce outputs in the form of goods and services
• Renewable resources


  Can be replenished, so the stock level of the resources can be maintained over a period of time
• Renewable resources are sustainable, but currently resources are being consumed faster than the planet can replace them
• Non-renewable resources


  Cannot be renewed, the stock level decreases over time as it is consumed