Economics Basics: Scarcity and Factors of Production

Study Notes

The Basic Economic Problem

The fundamental economic problem is the scarcity of resources, which means there are too few resources to produce all the goods and services that consumers need and want.
Unlimited wants and needs are faced with finite resources, leading to scarcity.

Factors of Production

Resources or factors of production are used to make goods and services.
The four main factors of production are:
- Land: natural resources used in production (e.g., land).
- Labour: human effort used in production of goods and services (e.g., workers).
- Capital: man-made resources used to produce goods and services (e.g., tractor).
- Enterprise: skills and willingness to take risks required to organize productive activities.

Opportunity Cost

Opportunity cost is the cost of choosing between alternative uses of resources.
Choosing one use means giving up the opportunity to use resources in another way, resulting in a loss of goods and services that could have been produced.
The problem of resource allocation is choosing how 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.

Production Possibility Curves and Choice

Opportunity cost can be shown using a production possibility frontier (PPF).
A PPF shows the maximum combinations of goods and services that can be produced by an economy in each period with its limited resources.
A PPF shows all the combinations of possibilities, involving two goods or options.

Allocation of Resources

Market prices determine what is profitable for producers.
Rising consumer demand for a product will tend to increase its price.

Market and Mixed Economic Systems

Market Economic System:
- Has a private sector only.
- Produces a wide variety of goods and services if it is profitable to do so.
- Only provides goods and services to consumers who are willing and able to pay.
Mixed Economic System:
- Has a private sector and a public sector.
- A government can try to correct market failures.
- Can allocate scarce resources to provide goods and services that people need.
- Can introduce laws and regulations to control harmful activities.

Description

Understand the fundamental problem of economics: scarcity of resources and unlimited wants. Learn about the factors of production, including land, labor, and capital. Test your knowledge of the basics of economics!