Basic economic ideas
CONTENTS
The fundamental economic problem
Factors of production
Positive and Normative statement
Production possibility curves
Movement in PPC curve
Shift in PPC curve
Money
Characteristics of money and barter
,The fundamental economic problem
The fundamental economic problem is:
‘scarce resources in relation to unlimited wants'.
Scarcity: The excess of human wants over what can actually be produced to fulfil these wants
Resources: inputs available for the production of goods and services.
Wants: needs that are not always realised.
Choice
Choice underpins the concept that resources are scarce so choices have to be made by consumers,
firms, and governments.
Sacrifice
Choice involves sacrifice. The more food you choose to buy, the less money you will have to spend on
other goods.
Opportunity cost
In other words, the production or consumption of one thing involves the sacrifice of alternatives. This
sacrifice of alternatives in the production (or consumption) of a good is known as its opportunity cost.
Opportunity cost is the cost expressed in terms of the best alternative that is forgone.
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, Factors of production
The central economic problem is that of scarcity. Given that there is a limited supply of factors of production, it is
impossible to provide everybody with everything they want. Potential demands exceed potential supplies.
Factors of production are the inputs into the production of goods and services. The four factors of production are:
Land
This factor is the natural resource.
Examples: Surface of the earth, lakes, rivers, forests or the area of land that makes up a farm or factory.
The reward for owning land is the income that is generated.
Labour
This factor is the human resource
The basic determinant of which is the nation’s population.
The reward for labour is the wage or salary that is paid.
Capital
This factor is any man-made aid to production.
Capital consists of all those inputs that have each had to be produced in the first place.
Capital goods help land and labour produce more units of output – they improve the output from land and labour.
Examples: factories, machines, transportation and other equipment.
The reward to capital is the rate of return that is earned. These three factors are organised into units of production by
firms.
Entrepreneur
This factor carries out two functions.
Enterprise:
organises the other three factors of production.
involves taking the risk of production
The return for enterprise is the profits that are made.
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, Positive and Normative statement
Positive statement
A positive statement is a statement of fact.
It may be right or wrong, but its accuracy can be tested by appealing to the facts.
Examples
‘Unemployment is rising’,
‘Inflation will be over 6 per cent by next year’,
‘If the government cuts taxes, imports will rise’
No value judgments are involved.
Normative statement
A normative statement is a statement of value.
It is a statement about what ought or ought not to be, about whether something is good or bad,
desirable or undesirable.
Here an opinion or value judgment is being made.
They cannot be proved or disproved by a simple appeal to the fact
Examples
‘It is right to tax the rich more than the poor’,
‘The government ought to reduce inflation’,
‘Old-age pensions ought to be increased’
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CONTENTS
The fundamental economic problem
Factors of production
Positive and Normative statement
Production possibility curves
Movement in PPC curve
Shift in PPC curve
Money
Characteristics of money and barter
,The fundamental economic problem
The fundamental economic problem is:
‘scarce resources in relation to unlimited wants'.
Scarcity: The excess of human wants over what can actually be produced to fulfil these wants
Resources: inputs available for the production of goods and services.
Wants: needs that are not always realised.
Choice
Choice underpins the concept that resources are scarce so choices have to be made by consumers,
firms, and governments.
Sacrifice
Choice involves sacrifice. The more food you choose to buy, the less money you will have to spend on
other goods.
Opportunity cost
In other words, the production or consumption of one thing involves the sacrifice of alternatives. This
sacrifice of alternatives in the production (or consumption) of a good is known as its opportunity cost.
Opportunity cost is the cost expressed in terms of the best alternative that is forgone.
too Lazy to Study .com
, Factors of production
The central economic problem is that of scarcity. Given that there is a limited supply of factors of production, it is
impossible to provide everybody with everything they want. Potential demands exceed potential supplies.
Factors of production are the inputs into the production of goods and services. The four factors of production are:
Land
This factor is the natural resource.
Examples: Surface of the earth, lakes, rivers, forests or the area of land that makes up a farm or factory.
The reward for owning land is the income that is generated.
Labour
This factor is the human resource
The basic determinant of which is the nation’s population.
The reward for labour is the wage or salary that is paid.
Capital
This factor is any man-made aid to production.
Capital consists of all those inputs that have each had to be produced in the first place.
Capital goods help land and labour produce more units of output – they improve the output from land and labour.
Examples: factories, machines, transportation and other equipment.
The reward to capital is the rate of return that is earned. These three factors are organised into units of production by
firms.
Entrepreneur
This factor carries out two functions.
Enterprise:
organises the other three factors of production.
involves taking the risk of production
The return for enterprise is the profits that are made.
too Lazy to Study .com
, Positive and Normative statement
Positive statement
A positive statement is a statement of fact.
It may be right or wrong, but its accuracy can be tested by appealing to the facts.
Examples
‘Unemployment is rising’,
‘Inflation will be over 6 per cent by next year’,
‘If the government cuts taxes, imports will rise’
No value judgments are involved.
Normative statement
A normative statement is a statement of value.
It is a statement about what ought or ought not to be, about whether something is good or bad,
desirable or undesirable.
Here an opinion or value judgment is being made.
They cannot be proved or disproved by a simple appeal to the fact
Examples
‘It is right to tax the rich more than the poor’,
‘The government ought to reduce inflation’,
‘Old-age pensions ought to be increased’
too Lazy to Study .com
