The basic economic problem

• The Basic Economic Problem


  There are too few resources to make all the goods and services that consumers need and want
• Unlimited wants and limited resources


  The scarcity of resources is the basic economic problem
• Economic goods


  A good or service that requires resources to produce and has a degree of scarcity and, therefore, an opportunity cost
• Free goods


  A good or service that is not scarce and is available in abundance
• Factors of Production


  • Land
  • Labour
  • Capital
  • Enterprise
• Consumers


  People or firms who need and want goods and services
• Resources or factors of production


  Used to make goods and services
• Land


  • Natural resources used in production
• Labour


  • Human resources used in the production of goods/services
• Capital


  • The manufactured resources that are used to produce goods/services
• Enterprise


  • The skills and willingness of a business person to take the risks required to organize productive activities
• Entrepreneurs


  Organize and combine resources in firms to produce goods and services
• Types of consumer goods


  • Durable consumer goods
  • Non-durable consumer goods
• Capital goods and semi-finished goods or components


  Used in production
• Rewards for Factors of Production


  • Land - Rent
  • Labour - Wages
  • Capital - Interest
  • Enterprise - Profits
• Mobility of Factors


  • Geographical Mobility
  • Occupational Mobility
• Geographical Mobility


  Willingness and ability of a person to relocate from one area to another due to employment purposes
• Occupational Mobility


  Ease with which a person can change between jobs
• Reasons why many workers are not willing to relocate


  • Family Ties and Related Commitments
  • Cost of Living
• Changes in the Quantity or the Quality of Factors of Production

  • Cost (Labour Costs, Raw materials costs)
  • Government Policies (Taxes, Subsidies)
  • New Technology
  • Migration of Labour
  • Improved Education and Healthcare
  • Weather Conditions (Agricultural Products)
• Opportunity cost


  The cost of the next best alternative while choosing the uses of a resource
• Choosing one use will always mean giving up the opportunity to use resources in another way, & the loss of the next best goods & services they might have produced instead
• The problem of resource allocation

  Choosing how best to use limited resources to satisfy as many needs and wants as possible and maximize economic welfare
• Economics aims to find the most efficient resource allocation
• Opportunity cost examples


  • A person invests $10,000 in a stock, could have earned interest by leaving 10,000 dollars in a bank account instead
  • A city decides to build a hospital on vacant land, could have built a school or sports centre
• Production Possibility Curves (PPC) Diagrams


  Show the maximum combinations of two goods and services that an economy can produce in each time period with its limited resources
• An economy shouldn't have any unemployment of factors of resources to be on the PPC
• A point within the curve signifies like X, represents inefficiency
• A point outside the curve, like Y, represents combinations that cannot be produced due to the lack of resources
• Movement in PPC and Shift of PPC


  • Movement in PPC
  • Shift in PPC
• Movement in PPC


  When the resources utilized are moved from one product to another
• Shift in PPC


  The PPC line is moved due to better availability of resources or a decrement in resources