1.1 The Economic Problem

• • The 4 factors of production are LAND, LABOUR, CAPITAL and ENTREPRENEURSHIP​
  • Resources are used in the production process to produce goods and services​
• Scarcity


  A situation that arises because people have unlimited wants in the face of limited resources
• Needs are necessary to sustain human life e.g. air and food, Wants are things people would like to consume e.g. a trip to the cinema
• Factors of production


  The limited resources that are scarce, including LAND, LABOUR, CAPITAL and ENTREPRENEURSHIP
• Free goods


  Goods with zero opportunity cost, that can be produced by society in as much quantities as needed with little or zero effort
• Examples of free goods


  • Air, Water, Intellectual ideas, By-products
• Economic goods


  Goods with an opportunity cost, that take time and resources to produce, and are scarce
• Goods and services have the ability to satisfy wants, Wants are satisfied through consumption, Wants tend to be unlimited, However, all wants cannot be satisfied so people must make choices
• The economic problem is about analysing the choices made by individuals, firms and governments
• The fundamental economic problem faced by any society is that of scarcity, which arises because people have unlimited wants in the face of limited resources, therefore choices must be made
• Economics


  The study of how to allocate resources in the most effective way
• Positive statements are about what is, i.e. about facts, Normative statements involve a value judgement that is about what ought to be
• Microeconomics


  The study of economic decisions taken by individual economic agents, including households and firms, tends to focus on individual markets
• Macroeconomics


  The study of the interrelationships between economic variables at an aggregate (total) economy wide level
• Economic agents


  Households, Firms, Governments
• Households


  Make choices about their expenditure (what goods and services to buy) and where to supply their labour, Aim to maximise satisfaction (utility) from their expenditure and income from working (supplying labour)
• Firms


  Make choices about which goods and services to produce, the production techniques they will use, and the prices they sell at, Aim to maximise profit
• Governments


  Make choices about types of taxation and how much to tax, how to spend tax revenue and how to regulate markets, Aim to maximise welfare for society
• Factors of production


  The resources people use to produce goods and services, including Land, Labour, Capital and Entrepreneurship
• Households


  Make choices about their expenditure (what goods and services to buy)
• Firms


  Make choices about which goods and services to produce, the production techniques they will use, and the prices they sell at
• Governments


  Make choices about types of taxation and how much to tax, how to spend tax revenue and how to regulate markets
• Factors of production


  The resources people use to produce goods and services; they are the building blocks of the economy
• Land


  All natural physical resources - e.g. fertile farm land, the benefits from a temperate climate or the harnessing of wind power and solar power and other forms of renewable energy
• Rewards of factors of production


  Rent for land, wages for labour, interest for capital, and profit for enterprise
• Economic goods are scarce and have an attached value, while free (non-economic) goods are unlimited in supply and have no opportunity cost
• As a good becomes scarce

  Its supply falls and price rises to ration the good
• Prioritising production and consumption of economic goods

  Can degrade/exhaust the supply of free goods
• Economics assumes people take the course of action which maximises their own utility, but the net effect may be to deplete a resource making everyone worse off in the long run
• Both free goods and economic goods have utility for economic agents
• The discussion depends on how narrowly you define a good or service - 'air' may be a free good but 'clean air' is an economic good for many people nowadays
• Most economic theory assumes economic agents behave rationally, balancing marginal benefit against marginal cost
• Evidence suggests firms and large organisations are more likely to operate rationally and profit-maximise, while smaller firms and start-ups may have other objectives beyond just profit
• The assumption of rational behaviour can be questioned - firms may not always aim to maximise profits, and consumers may not always take decisions in their best interests
• Labour is the human input into production 
• Capital goods are used to produce other consumer goods and services in the future​

  • Fixed capital includes machinery, equipment, new technology, factories and other buildings​
  • Working capital means stocks of finished and semi-finished goods (or components) that will be either consumed in the near future or will be made into consumer goods
• • Entrepreneurship ​
  • Regarded by some as a specialised form of labour input​
  • An entrepreneur is an individual who supplies products to a market to make a profit​
  • Entrepreneurs will usually invest their own financial capital in a business and take on the risks. Their main reward is the profit made from running the business