Eco chapter 1

• Resources


  • Water
  • Plants
  • Animals
  • Soil
  • Minerals
  • People
• Scarce


  Limited resources
• Factors of production


  The resources used to produce goods and services
• All societies face the economic problem of how to make the best use of limited, or scarce, resources
• The economic problem exists because the needs and wants of people are endless, but the resources available to satisfy them are limited
• Factors of production


  • Land
  • Labour
  • Capital
  • Enterprise
• Needs


  The basic requirements for human survival like water, food, warmth, shelter and clothing
• Wants


  Other desires humans have like holidays abroad, a better house, a bigger car, improved healthcare
• Wants are unlimited or infinite
• There is never enough land, labour, capital or enterprise (Finite/Scarce resources) to produce all the needs and unlimited wants (Infinite wants) of the whole population
• Basic economic problem


  Allocation of nation's scarce resources between competing uses that represent infinite wants
• Demand for resources is greater than their supply
• Decisions a country needs to make

  • What to produce
  • How to produce
  • For whom to produce
• Opportunity cost


  The cost of the next best alternative given up when making a choice
• Opportunity cost is the cost of the movie ticket plus the chance of doing something else in those 3 hours
• Production Possibility Frontier (PPF)


  The line that shows the different combinations of two goods an economy can produce if all resources are used up
• PPF combinations


  • A: 16mln consumer goods & zero capital goods
  • B: 14mln consumer goods & 4mln capital goods
  • C: 8mln consumer goods & 7mln capital goods
  • D: 8mln capital goods & zero consumer goods
  • E: 12mln consumer goods & 7mln capital goods (not possible)
  • F: 8mln consumer goods & 4mln capital goods
• Consumer goods


  Goods purchased by households, e.g. food, cars, mobile phones
• Capital goods


  Goods purchased by firms and used to produce other (consumer or capital) goods, e.g. machinery, tools, equipment
• Moving on the PPF

  Opportunity cost - production of capital goods increases from zero to 4mln, but production of consumer goods decreases from 16mln to 14mln
• More capital goods today means more consumer goods in the future, but less consumer goods today means not enough for all people and prices increase
• PPF shifts outwards when production increases and resources are used more efficiently, resulting in economic growth
• Reasons for economic growth

  • New technology advancements
  • Improved efficiency
  • Education and training
  • New resources
• PPF shifts inwards when production decreases, resulting in negative economic growth
• Reasons for negative economic growth

  • Resource depletion
  • Weather patterns
  • Reduction of highly qualified/skilled/experienced workers