Ch1&2 - the economic problem and economic assumptions

• Unlimited wants

  People's desire for goods and services e.g. more holidays abroad, a better house, a bigger car, better education, improved health care
• Finite (limited) resources

  Resources that are scarce or limited
• Needs

  Basic requirements for human survival include water, food, warmth, shelter and clothing
• Wants

  People's desire for goods and services e.g. more holidays abroad, a better house, a bigger car, better education, improved health care
• Basic economic problems occur because the world's resources are scarce or finite and people's wants are infinite
• Demand for resources is greater than their supply
• Decisions that have to be made to overcome economic problems

  1. What to produce?

  2. How to produce?

  3. For whom to produce?
• Opportunity cost


  The cost of the next best alternative given up
• Capital goods


  Those purchased by firms and used to produce other goods such as factories, machinery tools and equipment
• Consumer goods


  Those purchased by household such as food, car, tablets confectionery
• Production possibility curves (PPCs)

  Maximum possible output of two goods an economy can produce if all resources have been used
• Reasons for economic growth

  • New technology
  • Improved efficiency
  • Education and training
  • New resources
• If PPC shift inwards

  This would represent negative economic growth (where a country's productive potential actually falls)
• Reasons for negative economic growth

  • Resource depletion
  • Adverse weather patterns
  • Skilled workers moving overseas
• Underlying economic assumptions are that consumers aim to maximise their benefit and businesses aim to maximise their profit
• Reasons why consumers may not maximise their benefits

  • Consumers are not always good at calculating their benefits
  • Consumers have habits that are hard to give up
  • Consumers sometimes copy others' behaviour
• Reasons why producers may not maximise their profit

  • Producers may have managers that revenue maximise or sales maximise
  • Producers may prioritise caring for customers
  • Producers may complete charitable work
• Production possibility curves (PPCs)

  • Show the maximum quantity of goods that can be produced

  A) outside PPC curve

  B) negative economic growth