LlEconomics

Section:1
Topic:1
Basic Economic
Problem

Economics:
It is a social science that studies human behaviour between
unlimited wants and limited resources with their alternative
uses. In other words, it just simply tells us how we can make the

best use of what we have in order to satisfy our needs and wants.

Micro economics Macro economics

The study of the The study of the whole
behaviour and decisions economy. This includes
of households and firms employment, economic
and the performance of output, inflation etc in
individual markets. the country.
 Needs Wants
The essential goods and These are good services
services required for human not essential for
survival. survival.
These include food, shelter, These include luxury
clothing, etc. cars, luxury clothing, etc

Goods Services
These are physical items such These are non-physical
as tables, clothes, car etc items such as travelling,
teaching, Internet etc
You can touch them
You can't touch
The Economic Problem:
What stop people from enjoying all the products they would like
to have is lack of resources to produce them.
Resources are the factors used to produce goods and services.
These might include workers machinery land.

The Economic Problem:

The resources are limited while the wants and needs of the people
are unlimited. This concept is also known as scarcity.
Our wants are infinite we always want more of everything for
instance better clothing, better healthcare, better transportation,
better housing not etc. However, at any given time the resources
required to fulfil those for example the workers needed the
resource needed are limited in nature.

>We have to make a choice on how our resources are to be used.

Types of goods:
2 W example

Economic good:
Majority of goods and services are economic goods meaning it
takes resources to produce them and they are limited in supply.
for example, mobile phones, cars, houses etc.

Free goods: 2 w example

Free goods are rare in nature free goods are defined as goods that
take no resources to make it. For example, sunshine, water in
rivers.
Factors of production:
Factors of production is another term for economic resources.

These include land, labour, capital and enterprise.

1) land:
Land is the gift of nature available for production. E represents
all the natural resources which are consumed during a business
activity.
It includes the Earth in which crops are grown, on which offices
and factories are built, what is beneath the Earth such as coal,
what naturally occurs on land for example rainforest, seas,
oceans and rivers and what is found in them for example fish.
2) labour:
Labour includes all human effort. This includes both mental
and physical effort, involved in producing goods and services.
E.g Doctor, a teacher, a bank manager, an engineer all are count
as labour.

3) Capital:
Capital is any human made manufactured good used to
produce other goods and services. It includes for example offices,
factories, machinery, railways, and tools.
NOTE:
Capital and consumer goods both differ from each other capital
goods are used in the production process while consumer goods
are goods and services purchased by household for their own
satisfaction.
When deciding if a good is a capital or a consumer good, it is
important to consider who the user is and the purpose of its use.

4) Enterprise:
enterprises the willingness and ability to bear uncertain risks
and to make decisions in a business. Entrepreneurs are the
people who organise the other factors of production and who
crucially where the risk of losing their money if the business
business fails. Entrepreneurs are the people who decide what to
produce by taking into account consumer demand and how to
produce it.
Income of factors of production:
• Rent is paid against land.
• Wages and salaries are paid to labour.
• Rent is given for fixed capital and interest can be earned on
working capital/money.
• Dividends are paid on shares of a company to the shareholders

and entrepreneurs are a profit.

Mobility of the factors of production:

• Occupational mobility refers to the ability of a factor of
production to change its use.
• Geographical mobility is the capability of a factor of

production to move from one place/location to another.

Land:
Occupational mobility:
Most land is occupationally mobile meaning that it can be used
for a number of purposes. Land which is currently being used
for farming may be used to build houses trees can be used to

make tables or cupboards.

Geographical mobility:
Land in its traditional sense is geographically immobile it is
not possible to move a section of land from Pakistan to Sri

Lanka.
Some form of land can be moved to a certain extent, for example

wood can be taken from one place to another.

Labour:
Occupational mobility:
Occupational mobility of labour might be affected due to a
number of reasons. There might be lack of information about
vacancies in other types of jobs and most importantly lack of
appropriate skills and qualifications. E.g A shortage of doctors

cannot be solved by hiring bus drivers.

Geographical mobility:
There are several reasons that might affect the geographical
mobility of labour including differences in price and
availability of housing in different areas and countries,
family ties lack of information, restrictions on the movement

of workers.
Capital:
Occupational mobility:
Occupational mobility of capital depends on the type of the good
for example, a photocopier is only used for the purpose it was
created to fulfil on the other hand delivery van used originally
by a book publisher maybe bought and used by a toy
manufacturer to distributes its products. Similarly, an office

block may be used for variety of purposes.

Geographical mobility:
Geography mobility of capital also depends on the type of goods
for example a helicopter can be used by the army of one country
and can be sold to and then used by the army of another
country. However, a coal mine or an oil rig are fixed in position

And our geographically Immobile.

Enterprise:
Occupational mobility:
Enterprise is the most mobile factor of production. The skills
involved in being an entrepreneur can be applied in every
industry. Someone who has borne uncertain risks and
organised factors of production in the car industry should be

able to do this in for example the textile industry as well.

Geographical mobility:
Enterprise is also highly geographically mobile as someone who
has been successful in starting up and running a business in
one country is likely to be successful in another country as

well.
Sectors in the economy:

• Primary:
This sector includes the extractive industries that acquire raw
materials from naturally available resources for example,
agriculture, mining etc.
• Secondary:
This sector comprises of the manufacturing industries that
convert raw materials into semifinished or finished goods for
example textile industries.

• Tertiary sector:
Tertiary sector represents all kinds of services such as banking,
retailing, teaching etc.
NOTE:
All the above mentioned sectors are independent of each other to
produce goods and services. The sectors are linked together in
what is known as chain of production. For example oil is
extracted from the ground (primary), then refined in an oil
refinery (secondary), transported by tankers (tertiary) and
sold at gas stations.
Opportunity cost:
People are forced to make choices due to the presence of the basic
economic problem. Opportunity cost is defined as the next best
alternative forgone in simpler terms, it is the cost of a decision
in terms of the best alternative given up to achieve it. It can also
be referred to as the sacrifice that you have to make in order to

achieve a particular aim/product/service etc.

• Opportunity cost and consumers:

Consumers are buyers and users of goods and services. An
individual has $1000 and they can either buy a laptop or a
smart phone. If the individual chooses the laptop, the smart phone
becomes the opportunity cost.
• Opportunity cost and workers:
Undertaking one job involves an opportunity cost. People
employed as teachers might also be able to work as civil servants
but they will have to choose.
A number of factors influence the preference for the job for
instance the wage paid, chances for promotion, job satisfaction to
be gained from each job.
If the pay of civil servants or the working conditions improve,
the opportunity cost of being a teacher will increase.

• Opportunity cost and producers:

Producers have to decide what to make. If a farmer uses a field to
grow oranges, he cannot keep kettle on that field. Moreover, if a
Car producer uses some of his factory space and workers to
produce one model of a car, he cannot use the same space and
workers to make another model of the car at the same time.
In deciding what to produce, private sector firms will tend to
choose the option which gives them the maximum profits.
• Opportunity cost and government:
The government has to decide very carefully where to spend its
tax revenue. If it decides to spend more on the education sector,
the opportunity cost would be borne by the healthcare sector.