The economic problem:
The economic problem is that our wants are unlimited and our means of satisfying these wants (resources) are limited.
What to produce? Decide which wants are most important to consumers
How much to produce? Allocate resources efficiently to maximise satisfaction of wants
How to produce? An economy must allocate resources in the production process. It must look for the most efficient method of production that uses the least amount of resources.
How to distribute? Distribution amongst the population depends on your total share of production ie) income. Each economy must decide to be equitable or inequitable.
Wants are divided up between needs (essential items for survival) and individual wants (make their live easier, or give them pleasure)
The resources we have are scarce; the resources we have to satisfy our wants are limited.
The need for choice by:
Individual wants are the desires of each person. What is desired will depend on personal preferences. How much an individual will be able to satisfy their wants will depend on their level of income.
Are the wants of the whole community? What is desired will depend on the community as a whole. Collective wants are provided by the government using tax revenue.
Opportunity cost basically means if you satisfy one want you can’t satisfy another want. Individuals: May have to choose between satisfying there desire (car) and foregoing a holiday.
Business: Must make a choice in the allocation of resources is they decide to produce shoes. They give up the opportunity to produce something else eg) furniture.
Government: Governments has limited resource that it can use for community wants eg) constructing a new motor-way, at the expense of a new school.
Production possibility frontiers
- Con be used to demonstrate how opportunity cost arise when individuals and the