the economic problem

• Economic goods


  Benefit society, have the problem of scarcity and have an opportunity cost. Since they are scarce, they have some value, so consumers will pay for them, and they can be traded.
• Free goods


  Have no opportunity cost, because there is no scarcity of the good. For example, air and water are free goods. These goods are not traded because they are freely available.
• Scarcity


  The basic economic problem is scarcity. Wants are unlimited and resources are finite, so choices have to be made. Resources have to be used and distributed optimally.
• Positive statements

  Objective, can be tested with factual evidence, and can consequently be rejected or accepted. Look for words such as 'will', 'is'.
• Normative statements


  Based on value judgements, subjective and based on opinion rather than factual evidence. Look for words such as 'should'.
• Economic agents


  • Government
  • Firms
  • Households
• Government


  Assumed to act on behalf of consumers. Governments intervene in the economy to different extents.
• Firms


  Generally assumed to aim to maximise their profits. This is the reward entrepreneurs receive for taking risks and making investments. Some firms might have different objectives.
• Households


  Have to make decisions about how to spend their limited resources. Usually, consumers choose the option which maximises their utility.
• Factors of production


  • Capital
  • Entrepreneurship
  • Land
  • Labour
• Renewable resources


  Can be replenished, so the stock level of the resources can be maintained over a period of time.
• Non-renewable resources


  Cannot be renewed. There are only finite resources, and this scarcity means the resource is unsustainable.
• Rational decision making


  1. Identify the problem

  2. Find and identify the decision criteria

  3. Weigh the criteria

  4. Generate alternatives

  5. Evaluate alternative options

  6. Choose the best alternative

  7. Carry out the decision

  8. Evaluate the decision
• This is not always the best or most realistic way for firms to make decisions. Although it might be fairer than making an intuitive decision, it takes significantly longer to decide, which is not practical in a firm with strict time constraints.