1.1: 2-6 basic economic problem

• Man’s physical needs are the essentials, the basics of life we cannot live without.
• Man’s wants are items, activities or services that increase one’s quality of life.
• Factors of Production

  1. land
  2. labour
  3. capital
  4. enterprise
• factors of production - reward

  land - rent

  labour - salary

  capital - rate of return

  enterprise - profit
• As scarcity exists, decisions must be made by society about how to allocate resources:

  1. What to produce?
  2. How to produce?
  3. For whom to produce?
• free market economies: households own resources and free markets allocate resources through the workings of the price mechanism. There is limited role for the government.
• mixed economies: some resources are owned by the public sector (government) and some resources are owned by the private sector.
• command economies: scarce resources are owned by the state (i.e. government).
• Opportunity cost measures the cost of any choice in terms of the benefits of the next best or highest valued alternative foregone.