Economics Chapter 1: The Basic Economic Problem

The Basic Economic Problem

• The fundamental economic problem arises due to the scarcity of resources, which cannot meet the unlimited needs and wants of consumers.
• This leads to the need to make choices about how to allocate resources in the most efficient way.

Economic and Free Goods

• Economic goods are scarce, require resources to produce, and have an opportunity cost.
• Free goods, on the other hand, are abundant and do not require resources to produce, such as the air we breathe.

Factors of Production

• The four factors of production are:
  • Land: natural resources used in production, such as land.
  • Labour: human resources used in production, such as workers.
  • Capital: manufactured resources used in production, such as tractors.
  • Enterprise: the skills and willingness of a business person to take risks and organize productive activities.

Rewards for Factors of Production

• Each factor of production receives a reward:
  • Land: rent
  • Labour: wages
  • Capital: interest
  • Enterprise: profits

Mobility of Factors

• Mobility of factors refers to the ability of factors to move from one production area to another.
• There are two types of mobility:
  • Geographical mobility: the ability of workers to relocate to another area for employment.
  • Occupational mobility: the ease with which a person can change between jobs.

Changes in the Quantity or Quality of Factors of Production

• Changes in factors of production can affect the economy, such as:
  • Changes in cost, government policies, new technology, migration of labour, improved education and healthcare, and weather conditions.

Opportunity Cost

• Opportunity cost is the cost of the next best alternative when choosing the use of a resource.
• It represents the value of the benefits forgone of the next best thing that could have been done.
• Examples of opportunity cost include:
  • Investing $10,000 in a stock instead of leaving it in a bank account, and the opportunity cost is the potential interest.
  • Building a hospital on vacant land instead of a school or sports centre, and the opportunity cost is the value of the benefits forgone.

Production Possibility Curves (PPC) Diagrams

• Opportunity cost can be shown using a production possibility curve (PPC) diagram.
• PPC diagrams show the maximum combinations of two goods and services that an economy can produce in each time period with its limited resources.