basic economics

Topics: Economics, Final goods, Good Pages: 10 (5477 words) Published: September 30, 2014
Cambridge University Press
978-0-521-12665-6 - Cambridge International AS and A Level Economics, Second Edition Colin Bamford and Susan Grant
More information



Basic economic ideas

Basic economic ideas

On completion of this core section you should know:
• what is meant by scarcity and the inevitability of choices that have to be made by individuals, firms and governments
• what is meant by opportunity cost
• why the basic questions of what, how and for whom production takes place have to be addressed in all economies
• what is meant by factors of production, namely land, labour, capital and enterprise • what is meant by the division of labour
• the characteristics of a production possibility curve
• how resources are allocated in market, planned and mixed economies • problems of transition when central planning in an economy is reduced • the difference between positive and normative statements in Economics • the functions and characteristics of money.

One economic problem or many?
Economists have to deal with a whole range
of economic problems. You may have seen TV
programmes about the misery of unemployment and
poverty; you may have read about the difficulties
caused by inflation or heard politicians discuss
exchange rate crises on the evening news. You may
also be aware of debates surrounding issues such as the
acute shortage of skilled labour, the benefits of greater
liberalisation of international trade, the problems of
global warming and the population explosion in many
developing economies. Despite this extensive range of
issues, which economists are trained to consider, they
often talk about ‘the economic problem’. This is the
fundamental problem from which all others arise. This
is the fact that we have scarce resources to satisfy our
unlimited wants. As a result of this problem, which
is sometimes called the problem of scarcity, we have
to make a choice, and it is the task of the economist
to explain and analyse the nature of choice facing
economic agents, such as consumers, producers and
The economic problem is: ‘scarce resources
in relation to unlimited wants’. This problem is
summarised in Figure 1.1 (page 16). Because the basic

economic problem exists, societies need to confront
the following three interrelated questions:
1 What to produce?
Because we cannot produce everything, we need to
decide what to produce and in what quantities. We
have to choose, for example, whether to produce
lots of goods and services, such as food, clothing
and vehicles, to improve our standard of living, or
whether we need to produce lots of military hardware
to improve our defences.
2 How to produce?
This question arises from the basic economic
problem that, since resources are scarce in relation
to unlimited wants, we need to consider how
resources are used so that the best outcome arises.
We need to consider how we can get the maximum
use out of the resources available to us. It should
be noted, however, that other issues besides purely
economic concerns should be considered when
deciding how to produce. It may be true, for
example, that through slavery or forced labour
we could produce more goods and services in an
economy, but there is a moral objection to such
arrangements. Similarly, crop yields could well be


© in this web service Cambridge University Press

Cambridge University Press
978-0-521-12665-6 - Cambridge International AS and A Level Economics, Second Edition Colin Bamford and Susan Grant
More information















Figure 1.1 Elements of the economic problem

increased through the introduction of genetically
modified plants but this may lead to damage to
the ecosystem. The decision to maximise...
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