Section 1
The Economic Problem
Need: a good or service essential for living. Examples include water
and food and shelter.
Want: a good or service that people would like to have, but is not
required for living. Examples include cars and watching movies.
Scarcity is the basic economic problem. It is a situation that exists
when there are unlimited wants and limited resources to
produce the goods and services to satisfy those wants. For
example, we have a limited amount of money but there are a lot of
things we would like to buy, using the money.
Opportunity cost
Opportunity cost is the next best alternative forgone by choosing
another item. Due to scarcity, people are often forced to make
choices. When choices are made it leads to an opportunity cost
SCARCITY → CHOICE → OPPORTUNITY COST
Example: the government has a limited amount of money (scarcity)
and must decide on whether to use it to build a road, or construct a
hospital (choice). The government chooses to construct the hospital
,instead of the road. The opportunity cost here are the bene ts from
the road that they have sacri ced (opportunity cost).
Factors of Production
Factors of Production are resources required to produce goods or
services. They are classi ed into four categories.
• Land: the natural resources that can be obtained from nature.
This includes minerals, forests, oil and gas. The reward for
land is rent.
• Labour: the physical and mental efforts put in by the workers
in the production process. The reward for labour is wage/
salary
• Capital: the nance, machinery and equipment needed for the
production of goods and services. The reward for capital is
interest received on the capital
• Enterprise: the risk taking ability of the person who brings the
other factors of production together to produce a good or
service. The reward for enterprise is pro t from the business.
Specialization
Specialization occurs when a person or organisation
concentrates on a task at which they are best at. Instead of
everyone doing every job, the tasks are divided among people who
are skilled and ef cient at them.
Advantages:
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, • Workers are trained to do a particular task and specialise in
this, thus increasing ef ciency
• Saves time and energy: production is faster by specialising
• Quicker to train labourers: workers only concentrate on a
task, they do not have to be trained in all aspects of the
production process
• Skill development: workers can develop their skills as they do
the same tasks repeatedly, mastering it.
Disadvantages:
• It can get monotonous/boring for workers, doing the same
tasks repeatedly
• Higher labour turnover as the workers may demand for
higher salaries and company is unable to keep up with their
demands
• Over-dependency: if worker(s) responsible for a particular
task is absent, the entire production process may halt since
nobody else may be able to do the task.
Purpose of Business Activity
So we’ve gone through factors of production, the problem of
scarcity and specialization, but what is business?
Business is any organization that uses all the factors of
production (resources) to create goods and services to satisfy
human wants and needs.
Businesses attempt to solve the problem of scarcity, using scarce
resources, to produce and sell those goods and services that
consumers need and want.
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The Economic Problem
Need: a good or service essential for living. Examples include water
and food and shelter.
Want: a good or service that people would like to have, but is not
required for living. Examples include cars and watching movies.
Scarcity is the basic economic problem. It is a situation that exists
when there are unlimited wants and limited resources to
produce the goods and services to satisfy those wants. For
example, we have a limited amount of money but there are a lot of
things we would like to buy, using the money.
Opportunity cost
Opportunity cost is the next best alternative forgone by choosing
another item. Due to scarcity, people are often forced to make
choices. When choices are made it leads to an opportunity cost
SCARCITY → CHOICE → OPPORTUNITY COST
Example: the government has a limited amount of money (scarcity)
and must decide on whether to use it to build a road, or construct a
hospital (choice). The government chooses to construct the hospital
,instead of the road. The opportunity cost here are the bene ts from
the road that they have sacri ced (opportunity cost).
Factors of Production
Factors of Production are resources required to produce goods or
services. They are classi ed into four categories.
• Land: the natural resources that can be obtained from nature.
This includes minerals, forests, oil and gas. The reward for
land is rent.
• Labour: the physical and mental efforts put in by the workers
in the production process. The reward for labour is wage/
salary
• Capital: the nance, machinery and equipment needed for the
production of goods and services. The reward for capital is
interest received on the capital
• Enterprise: the risk taking ability of the person who brings the
other factors of production together to produce a good or
service. The reward for enterprise is pro t from the business.
Specialization
Specialization occurs when a person or organisation
concentrates on a task at which they are best at. Instead of
everyone doing every job, the tasks are divided among people who
are skilled and ef cient at them.
Advantages:
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, • Workers are trained to do a particular task and specialise in
this, thus increasing ef ciency
• Saves time and energy: production is faster by specialising
• Quicker to train labourers: workers only concentrate on a
task, they do not have to be trained in all aspects of the
production process
• Skill development: workers can develop their skills as they do
the same tasks repeatedly, mastering it.
Disadvantages:
• It can get monotonous/boring for workers, doing the same
tasks repeatedly
• Higher labour turnover as the workers may demand for
higher salaries and company is unable to keep up with their
demands
• Over-dependency: if worker(s) responsible for a particular
task is absent, the entire production process may halt since
nobody else may be able to do the task.
Purpose of Business Activity
So we’ve gone through factors of production, the problem of
scarcity and specialization, but what is business?
Business is any organization that uses all the factors of
production (resources) to create goods and services to satisfy
human wants and needs.
Businesses attempt to solve the problem of scarcity, using scarce
resources, to produce and sell those goods and services that
consumers need and want.
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