Fundamental Economics

Topics: Economics, Economic system, Planned economy Pages: 16 (5078 words) Published: May 6, 2014

Fundamental Economic Concepts

SSEF1 The student will explain why limited productive resources and unlimited wants result in scarcity, opportunity costs and trade offs for individuals, businesses and governments.

Individuals have wants that are, for practical purposes, unlimited. But the total resources of society, including natural resources, human resources, capital goods and entrepreneurship, are limited, so that scarcity exists. As a result, it isn't possible for everyone to have everything he or she wants. No society has ever had enough resources to produce the full amount and variety of goods and services its members wanted. In a world of scarcity, producing any one good or service means that other goods and services cannot be produced, and trade-offs are inevitable.

a. define scarcity as a basic condition which exists when unlimited wants exceed limited productive resources

Scarcity is the condition that exists because human wants exceed the capacity of available resources to satisfy those wants; also a situation in which a resource has more than one valuable use. The problem of scarcity faces all individuals and organizations, including firms and government agencies.

b. define and give examples of productive resources as land (natural), labor (human), capital (capital goods), entrepreneurship

Productive resources are used to produce goods and services. Productive resources are classified into four categories. Land stands for natural resources or gifts of nature such as oil, iron ore, forests and water. Labor refers to human resources. Labor is more than the number of people willing and able to work. Labor also reflects the abilities of people and includes people's health, strength, education, motivation and skills. Capital refers to goods and services such as buildings, equipment, roads, dams and machinery. The level of technology also influences capital. Finally, entrepreneurship is a special kind of labor that represents the characteristics of people who assume the risk of organizing land, labor and capital resources to produce goods and services.

c. list a variety of strategies for allocating scarce resources

For a list of allocation strategies, see the table on back page of this document.

d. define opportunity cost as the next best alternative given up when individuals, businesses and governments confront scarcity by making choices.

Opportunity cost is what you must give up to obtain something else, the second-best alternative. However, what you must give up to obtain, say, a bicycle is not really money--it is whatever other good or service you would have spent the money on as your next-favorite choice. Similarly, what a government gives up to obtain, say, more educational services is not really money either--it is whatever alternative goods or services the government could have purchased instead, or the goods and services that individuals might have purchased if their taxes had been lower.

Opportunity cost includes all costs, including those of time or alternative activities. For example, one part of the opportunity cost of attending college is the money that could have been spent on something else, but another part is the cost in terms of time or alternative activities, when a student could have been working and earning income. As a different example, the opportunity cost for a business of holding a three-hour meeting with 30 employees attending isn't an additional monetary cost, since they are paying the employees already; instead, the opportunity cost of the meeting is the work that could have been accomplished if people hadn't had to attend the meeting. The opportunity cost of the meeting is the next-best alternative use of the time spent at the meeting.

A trade-off is the giving up of one benefit or advantage in order to gain another regarded as more favorable.

SSEF2 The student will give examples of how rational decision making...
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