✅ the basic economics problem
, 1. The basic economic problem
1.1 the nature of the economic problem
● The basic economic problem is the existence of unlimited wants and needs and finite
resources to satisfy these wants
● Economic good is one which is scarce and not unlimited in supply
● Free good is one which is unlimited in supply eg, sand
1.2 factors of production
● The factors of production are land, labour, capital and enterprise
Land
● Land is all natural resources in an economy
● Reward for land is rent
● Supply of land is fixed
● Quality of land depends on soil type, fertility, weather etc.
● Land is geographically immobile
● Land is occupationally mobile as it can be used for many activities
Labour
● Labour is all human resources available in an economy (the mental and physical efforts
and skills or workers/labourers)
● Reward for labour is wages/salaries
● Supply of labour depends on the size of the labour/workforce
● Quality of labour depends on education, skills, and qualifications
● Labour is geographically mobile unless they are unwilling to move due to:
- High costs of living
- Family commitments
● Labour is occupationally mobile is they posses the right skills
Capital
● Capital is all the mad-made resources in an economy which help to produce other goods
● Reward for capital is interest
● Supply of capital depends on demand for goods and services and savings (as capital is
paid for using loans, and bank loans come from savings)
● Quality of capital depends on how many good quality products the capital can produce
● Capital is geographically mobile depending on its size
● Capital is occupationally mobile depending on its function
- An office building is capital and is occupationally mobile
,Enterprise
● Enterprise is the ability to take risks and run a business venture
● Reward for enterprise is profit
● Supply of enterprise depends on entrepreneurial skills, education, corporate taxes,
regulations on starting businesses, etc.
● Quality of enterprise depends on its ability to satisfy and expand demand in an economy
in innovative, cost effective ways
● Enterprise is occupationally and geographically mobile
1.3 opportunity cost
● Opportunity cost is the cost of the next best opportunity forgone
● There is an opportunity cost with government expenditure as the government has a
limited budget and can choose to either spend it on one good over another (eg, schooling
instead of healthcare)
1.4 production possibility curve (PPC) diagrams
● PPC is the maximum combination of goods and services that can be produced in an
economy with all the available resources
● Point A is producing the
maximum amount of consumer goods
and no capital goods
● Point B is producing the
maximum number of capital goods and
no consumer goods
● Point C and D are producing both
capital and consumer goods, however
there is always more of some type of
good being produced
● Point E is within the economy’s
productive capacity and is an inefficient
use of resources
● Point F is outside the economy’s
productive capacity and is unattainable
● An outward shift of the PPC would lead to economic growth. This shift can be caused
by:
- discovering/developing new raw materials
- New technology/capital that improves productivity
- Increased/more productive labour force (more migration/more education)
, ● An inward shift in the PPC would lead to economic recession. This shift can be caused
by:
- Natural disasters
- Depletion of resources
- No investment in new technologies
, 1. The basic economic problem
1.1 the nature of the economic problem
● The basic economic problem is the existence of unlimited wants and needs and finite
resources to satisfy these wants
● Economic good is one which is scarce and not unlimited in supply
● Free good is one which is unlimited in supply eg, sand
1.2 factors of production
● The factors of production are land, labour, capital and enterprise
Land
● Land is all natural resources in an economy
● Reward for land is rent
● Supply of land is fixed
● Quality of land depends on soil type, fertility, weather etc.
● Land is geographically immobile
● Land is occupationally mobile as it can be used for many activities
Labour
● Labour is all human resources available in an economy (the mental and physical efforts
and skills or workers/labourers)
● Reward for labour is wages/salaries
● Supply of labour depends on the size of the labour/workforce
● Quality of labour depends on education, skills, and qualifications
● Labour is geographically mobile unless they are unwilling to move due to:
- High costs of living
- Family commitments
● Labour is occupationally mobile is they posses the right skills
Capital
● Capital is all the mad-made resources in an economy which help to produce other goods
● Reward for capital is interest
● Supply of capital depends on demand for goods and services and savings (as capital is
paid for using loans, and bank loans come from savings)
● Quality of capital depends on how many good quality products the capital can produce
● Capital is geographically mobile depending on its size
● Capital is occupationally mobile depending on its function
- An office building is capital and is occupationally mobile
,Enterprise
● Enterprise is the ability to take risks and run a business venture
● Reward for enterprise is profit
● Supply of enterprise depends on entrepreneurial skills, education, corporate taxes,
regulations on starting businesses, etc.
● Quality of enterprise depends on its ability to satisfy and expand demand in an economy
in innovative, cost effective ways
● Enterprise is occupationally and geographically mobile
1.3 opportunity cost
● Opportunity cost is the cost of the next best opportunity forgone
● There is an opportunity cost with government expenditure as the government has a
limited budget and can choose to either spend it on one good over another (eg, schooling
instead of healthcare)
1.4 production possibility curve (PPC) diagrams
● PPC is the maximum combination of goods and services that can be produced in an
economy with all the available resources
● Point A is producing the
maximum amount of consumer goods
and no capital goods
● Point B is producing the
maximum number of capital goods and
no consumer goods
● Point C and D are producing both
capital and consumer goods, however
there is always more of some type of
good being produced
● Point E is within the economy’s
productive capacity and is an inefficient
use of resources
● Point F is outside the economy’s
productive capacity and is unattainable
● An outward shift of the PPC would lead to economic growth. This shift can be caused
by:
- discovering/developing new raw materials
- New technology/capital that improves productivity
- Increased/more productive labour force (more migration/more education)
, ● An inward shift in the PPC would lead to economic recession. This shift can be caused
by:
- Natural disasters
- Depletion of resources
- No investment in new technologies
