The Basic Economic Problem
The Nature of the 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 and Free Goods
• 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. For
example, the air we breathe.
The Factors of Production
• Consumers are people or firms who need and want goods and services
• Resources or factors of production are used to make goods and services
LLCE
• Land: natural resources used in production (e.g. land)
• Labour: human resources used in the production of goods/services (e.g. workers)
• Capital: the manufactured resources that are used to produce goods/services (e.g.
tractor)
• 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
• Durable consumer goods last a long while (e.g., furniture) non-durable consumer goods
(e.g., food) do not
• Capital goods and semi-finished goods or components are used in production
Rewards for Factors of Production
• Land - Rent
• Labour - Wages
• Capital - Interest
• Enterprise - Profits
Mobility of Factors
• Refers to the degree of mobility while changing from one production area to another.
Geographical Mobility Occupational Mobility
Refers to the willingness and the ability of a
Refers to the ease with which a
person to relocate from one area to another
person can change between jobs.
due to employment purposes.
Reasons why many workers are not willing This would vary depending on the
to relocate - Family Ties and Related cost, training period and the
Commitments, Cost of Living educational professions.
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
• Opportunity cost is 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 is 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
• Example 1: A person invests $10,000 in a stock
o He could have earned interest by leaving 10,000 dollars in a bank account instead
o The opportunity cost of the decision to invest in stock is the value of the potential
interest
• Example 2: A city decides to build a hospital on vacant land; it owns
o Could have built a school or sports centre
o Opportunity cost is the value of the benefits forgone of the next best thing which could
have been done
Production Possibility Curves (PPC) Diagrams
• Opportunity cost can be shown using a production possibility curve (PPC)
• It shows the maximum combinations of two goods and services that an economy can
produce in each time period with its limited resources
• Each combination is a choice
• 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
The shift of PPC occurs when the PPC line is
Movement along the PPC is moved. This may be due to better availability of
when the resources utilized are resources (due to the Discovery of new
moved from one product to materials, Better Technology and more), which
another. For example, the causes an outward shift of the PPC or a
movement from Point A to Point decrement in resources (due to natural
B is shown in the above disasters, war and more) which causes an
diagram. inward shift of the PPC. An example is given
below.
