Economics Basics: Scarcity and Factors of Production

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.