Basic Economic problem
The nature of the economic problem
● Want
○ Desires for goods and services
● Resources
○ Factors used to produce good and services
● Economic problem
○ Unlimited wants exceeding finite resources; Company not able to satisfy customer wants
with its finite resources
● Scarcity
○ A situation where there is not enough resources to satisfy everyone’s wants
● Economic Goods
○ A product which required resources to produce it and therefore has an opportunity cost (a
price)
○ E.g Education, food, etc.
● Free Goods
○ A product which does not require any resources to make it and so does not have an
opportunity cost
○ E.g Sunshine, water in rivers etc.
● Economic resource
○ It is a factor of production used to produce goods and services (land, labour, capital,
enterprise)
Factors of production
● The economic resources of land, labour, capital and enterprise
● 4 factors of production
○ Land
○ Labour
○ Capital
○ Enterprise
● Land
○ Gifts of nature available for production
○ It includes the land, the items under the land such as coal etc. and even the living things
such as fish on the land
● Labour
○ All human effort used in producing goods and services
○ E.g A road sweeper, a steel worker, bank manager etc.
● Capital
○ Human-made goods used in production
○ Provide consumer goods such as food, clothing etc.
○ Consumer goods → goods and services purchased by households for their own satisfaction
● Enterprise
○ Risk bearing and key decision making in business
○ They bear the risk of losing money if business fails
○ Some risks faced such as floods, thefts etc.
● Mobility of economic resources
○ It comes in 2 forms → occupational and geographical mobility
○ Occupational mobility
■ Refers to the economic resource’s ability to change their use. For example, a farm
worker may leave his job and become a factory worker or a building might change
from a salon to a TV programme set.
■ If demand for housing increases, then farmland would be used for housing. An
entrepreneur running a car company can take up a new position in an IT company
○ Geographical mobility
■ Refers to the ability of economic resources to change their geographical location.
Most land is geographically immobile. Some types of capital goods can be moved
from one country to another. For example, fax machines can be moved from one
area to another. Buildings and airports are geographically immobile
■ The extent to which labour is geographically mobile depends on a number of factors
including the cost and availability of housing in different parts of the country and
family ties. Entrepreneurs tend to be both occupational and geographically mobile.
● Mobility of labour
○ Ability of labour to change where it works or in which occupation
○ Causes of geographical immobility-
■ Difference in the price and availability of housing
■ Family ties
■ Difference in education system
■ Higher salary
■ Lack of information
■ Restriction on the movement of workers
● Mobility of land
○ Most land is occupationally mobile but is geographically immobile
○ Land can be used to grow vegetables then build a house, then grow more vegetables on the
same land (occupationally mobile)
○ Rivers can change directions therefore are considered geographically mobile
● Mobility of capital
○ The ability to change where capital is used or i which occupation
○ Product might not be successful in the country therefore have to move or change the
product entirely
● Mobility of enterprise
○ The ability to change where enterprise is used or in which occupation
○ The mobility of enterprise depends on the mobility of the entrepreneurs
● Quantity of land
○ The amount of physical land does not change or increase in time. It's another point if you
buy more land
● Quality of land
○ Fertilizers can be used in fields to increase fertility
○ Rivers can be purified by stopping toxic waste from entering into the river
○ Pesticides are not good fo long term use
● Quantity of labour
○ Influenced by No. of workers and Amount of hours they work
○ No. of workers is determined by-
■ Size of the population
■ The age structure of the population
■ The retirement age of the population
■ The school leaving age
■ Attitude to working women
○ People who are working or seeking work from the labour force
○ No. of hours people work is influenced by-
■ Length of average working day
■ Duration of overtime
■ Length of holidays
■ Full time / part time
■ Time lost through sickness
○ An increase in labor productivity causes a major increase in country’s output
● Productivity
○ The output per factor of production in an hour
● Labour productivity
○ Output per worker hour
● Output
○ Goods and services produced by factors of production
● Quality of labour
○ Quality of labour can be improved with better education and training, more experience etc.
○ More quality, the more difficult tasks the people would be able to handle with efficiency
● Quantity of capital
○ Quantity of labour is influenced by investment (spending on capital goods) and tends to
increase with time
○ When new goods take place of old goods, the total value of the output of capital goods
produced is referred to as gross investment
○ Occasionally gross investment may be lower than depreciation. This is negative net
investment
● Depreciation
○ The value of capital goods that have worn out or become obsolete
● Net investment
○ It is the value of extra capital goods made
● Gross investment
○ It is the total spending on capital goods
● Negative net investment
○ A reduction in the number of capital goods caused by some obsolete and worn out capital
goods not being replaced
● Quantity of capital
○ Better technology enables higher output and better quality output
● Quantity of enterprise
○ The quantity will increase if there are more entrepreneurs
○ A good education and degree courses in eco ir business studies helps to develop
entrepreneurs in an economy
○ Lowe taxes on firms profits and a reduction in government regulations encourage people to
set up their own businesses
● Quality of enterprise
○ If entrepreneurs receive better education, better training, better experience, it can
improve the enterprise
Opportunity Cost
● When we choose the best alternative, the next best alternative forgone is the opportunity cost
● Relevance of opportunity cost in
○ Worker deciding whether to accept a new job
■ A worker in deciding whether to accept a new job would have to consider the
opportunity cost carefully. This is what he is giving up in terms of his current job.
This may include having a shorter distance to travel to work and good promotion
chances
○ Family deciding where to go for holiday
■ A family will consider where else it can go on holiday and what else it could do with
the time and money. For instance, the opportunity cost of a family holiday abroad
may be a holiday in the domestic economy or to purchase a second-hand car. Family
will weigh up the benefits of the choices, particularly the first and second choices.
○ An entrepreneur selecting which new product to launch
■ An entrepreneur will compare the expected area evenue, costs and profitability of a
number of products that could be launched. If a firm's resources are used to make
something else. If during the period of consideration, the prospects of the
proposed new product decline, the opportunity cost may become too high. In this
case the entrepreneur is likely to switch to the best alternative.
○ Production of economic goods
■ The production of economic goods involves the use of resources. This means that
they involve an opportunity cost. For instance, the factors of production that are
employed in the production of TV programmes cannot be used to educate university
students
Production possibility curve
● A curve that shows the maximum output f 2 types of
products and combination of those products that can be
produced with existing resources and technology
● A → under consumption
● D → Maximum use of resources
● X → not enough resources to produce outside ppc, its
unattainable
● Straight line PPC
○ Resources are equally suited to producing both types of products
● Shift in PPC
○ If there is increase in quantity or quality of resources, the PPC will shift to the right
○ A shift to the right means the maximum output that a country can produce increases
○ If there is decrease in quantity or quality of resources, the PPC will shift to the left
● Consequences of shift in PPC
○ A shift to the right increases a country;s productive potential. To take advantage of this,
better quality resources have to be employed
○ PPC moves to the right → output increases → a rise in country’s output → economic growth
