economics U-1 : 1-3

• What to produce, how to produce and for whom to produce


  The three fundamental economic questions related to the allocation of resources that all economies have to answer
• What to produce


  1. Economies cannot produce everything, so they must decide what to produce and in what quantities

  2. Firms and governments have to choose whether to produce lots of goods and services to improve standard of living or lots of military equipment to improve national defence
• How to produce


  1. Firms have to consider how resources are used to achieve the best outcome

  2. Firms need to consider how they can get the maximum use out of the resources available

  3. Firms may need to consider issues other than purely economic concerns when deciding how to produce
• For whom to produce


  1. Governments have to decide whether everyone is going to have a more or less equal share of what is produced or whether some will have more than others

  2. Some economies aim to create a more equal society through policies that redistribute wealth and income from the rich to the poor

  3. Other economies have extreme inequalities of income and wealth, often based upon inheritance
• As Japan's population ages


  There will likely be effects on what to produce, how to produce, and for whom to produce
• Scarcity and choice


  The three fundamental economics questions are typical of a trade-off between economic freedom for firms and individuals and a government that desires greater social equality and fairness
• Opportunity cost


  The cost of the choice in terms of the next best alternative
• Opportunity cost shows the real cost of choices and can be applied in a variety of contexts
• Opportunity cost is a recurring topic throughout the economics syllabus
• Opportunity cost needs to be considered whenever there are choices to be made
• Restricting the future growth of air transport would have opportunity costs that need to be considered
• Wants


  Things that improve the quality of life but are not essential for survival, like television, cars, and trips to the cinema
• Luxury


  A want that is considered non-essential by some but essential by others, depending on individual scales of preference
• Scale of preference


  An individual's ranking of their wants, with more urgent wants at the top and less urgent ones at the bottom
• An individual's scale of preference is influenced by culture, upbringing, and life experiences
• An individual's wants can change as they move through different life stages and make different choices
• Seeing others enjoy particular goods and services can create new wants
• New experiences can also create new wants
• The fundamental economic problem arises because resources are scarce while people's wants are unlimited
• Needs


  Things required for survival, like food, shelter, and clothing
• Needs are more important than wants because they are required for survival
• Individuals, firms, and governments have to make choices due to the scarcity of resources
• Making a choice involves taking decisions on how to allocate scarce resources between many competing uses