1.1.3: The Economic Problem

• Need: Something essential that you need to survive
• Want: Something you desire but is not essential
• The basic economic problem is that there are infinite wants and finite resources in an economy. Therefore choices must be made about how to allocate resources
• Land: Natural resources
• Labour: Work done by humans
• Capital: Man-made resources and machinery
• Enterprise: The combination of the other 4 factors or production with risk and the ability to organise
• The reward for land is rent
• The reward for labour is wages
• The reward for capital is interest
• The reward for enterprise is profit
• Microeconomics studies the behaviour of individuals and firms, while Macroeconomics considers the whole economy
• Consumers aim to maximise total utility
• Workers aim to maximise wages and benefit from work
• Producers aim to maximise profit
• Governments aim to maximise social welfare
• Opportunity cost is the value of the next best alternative forgone when making a choice