The Basic Economic Problem Quiz and Flashcards

Study Notes

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.

Description

Learn about the fundamental economic problem of scarcity and unlimited wants, and understand the differences between economic and free goods. Discover the concept of opportunity cost and its significance in economics.