The economic problem (Ch. 1)
- All materials on the earth (resources) are scarce (scarcity). - Resources are used to make goods and services.
- Some resources like air are free.
- All people have basic needs to survive i.e. food, air, water and shelter. - People want more than they need . - Wants are unlimited.
- The economic problem is how to decide the allocation of scarce resources to meet unlimited wants.
- Scarce resources have many alternative uses.
- The cost of choosing between goods and services (as all our wants cannot be met and we have to decide on a choice) is known as opportunity cost. - Opportunity cost is the benefit you would have received from the next best alternative.
- When choices are made in society there will a conflict of interests as not everyone will be satisfied with the decision made e.g. new road for motorists takes away land that could have been used by farmers. Specialisation and exchange (Ch. 2)
- An economy is an area in which people make goods and services.z - An economy usually comprises two main sectors i.e. the public sector and the private sector
- The private sector is all individuals plus the businesses and organisations owned by the general public
- The public sector is controlled by the government
- Production is any activity that meets people's wants i.e. the production of goods and services
- Consumption is the use of these goods and services
- Consumption expenditure is the amount spent on the use of goods and services - Very few people can make all the things they want so they must rely on trade or exchange-goods, services or money are exchanged between people or businesses
- The making of goods is known as production-scarce resources required to make goods are known as factors of production. Factors of production are input into a process from where a good (output) emerges There are four factors of production:
1-land 2-labour 3-enterprise 4-capital
The four factors of production
- Land is all natural resources e.g. land, minerals, water, animals, air - Labour is the most important factor of production as nothing is produced without people. People are human resources and their skills, education and numbers determine how much an economy can produce
- Enterprise is the know-how or ability of a person to run a business. To run a business you must be able to organise different resources to make goods and services-the people who can do this are known as entrepreneurs - Capital is all man made resources required to make goods and services e.g. machinery
Types of goods made from resources
- Consumer goods meet the wants of people (consumers). Consumer goods can be durable (last a long time) or non-durable (last only a short time) - Consumer services are when someone does something for us e.g. doctor - Capital goods are man made goods that then help to make other goods e.g. machinery. When you spend money to buy a capital good it is called investment as you hope to get a return on your money by selling the goods that you make (this return is known as profit) - Public goods are provided by government as everyone benefits from them even if they do not pay for them e.g. defence - Merit goods are provided by government as it thinks people should benefit from them even if they cannot afford it e.g. health and education Specialisation
- Self sufficiency is when each person produced all the things they wanted and needed - Some people are better are some tasks than others so people started to specialise in the tasks they were good at and so produce more of these goods - This is known as “division of labour”
- When there were more goods being made this then allowed any surplus goods to be traded with people making other goods
- This generates wealth as people are able to trade and their standard of living goes up
The advantages of division of labour are:
- More goods and services are produced - Full use of people's abilities - Saving in time