Basic Economic Problem
(choice and the allocation of resources)
Nature of the economic problem
– Finite Resources
– Unlimited Wants
1) Our needs are limited (finite) e.g. food, water, air, shelter, warmth. These are known as Free Goods.
2) Our wants are unlimited (infinite) e.g. clothes, cars, holidays, jewelry. These are known as Economic Goods.
We have infinite wants but limited resources in the world. Economic Agents- (individuals, firms, and governments) have to make rational choices between competing wants. Economic welfare refers to the benefit a person/society gets from the allocation of these competing resources
Role of an Economy
• The purpose of economic activity is to produce goods/services to provide both what people need and what we want.
• The role of an economy is to maximize the economic welfare of its citizens by answering 3 questions:
a) What should we produce?
b) How should it be produced?
c) For whom should it be produced?
Factors of Production (used to produce goods/services)
1. Land – resources available for production: land, buildings, shops
2. Labor – human effort available for production: workforce
3. Capital – man-made physical goods used to produce other goods/services: machinery, equipment, money (human capital- skills/abilities of workers resulting from investment in education/training) (anything that was bought or spent for)
4. Enterprise- Entrepreneur, who organizes FoP’s and risks his capital, managerial ability.
1. Land – rent
2. Labor – wages
3. Capital – interest
4. Enterprise – profit
All about making choices between alternatives
• Opportunity cost = the benefit lost from the alternative foregone
A farmer plants maize. 0pp cost = growing other crops, pasture farming.
A lawyer who earns $100 per hour takes the day off. Opp cost = Money lost
Resource Allocation : Opportunity Cost
When an economy is working at full capacity, you can’t have more of one