Unit 1 – Foundations and Fundamentals of Economics
Chapter 3:
The Economic Problem – The Problem of
Scarcity
Limited resources < Unlimited Wants
The Resources of the Economy
 Resources of Factors of Production are the various things that can be used
to produce goods and services
 Land – resources given to us by nature eg. Minerals, fish, oxygen, rivers,
lakes, sunlight
 Labour – physical and mental efforts that people contribute to production
 Capital – any manufactured good that is used for the production of other
goods and services
 Entrepreneurship – includes managerial and decision making skills; the
bringing together of the factors of production to organize them into
production
RESOURCES
Factors
of Production
Land
Labour
Capital
Entrepreneurship
Characteristics
Compensation
All natural resources
Human Resources
Manufactured Resources
Organization and
Decision Making skills
Rent
Wages and salaries
Interest and dividends
Profits
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SCARCITY, CHOICE and OPPORTUNITY COST
 Scarcity of resources requires a choice between wants
 Opportunity cost refers to the alternative that is sacrificed when a choice is
made
 eg. If a city decides to build a school instead of adding a wing to a hospital,
then the opportunity cost of the school is the additional hospital facilities
that the city would have had instead
PRODUCTION POSSIBILITIES
 the PPC (production possibilities curve) is an economic model that
illustrates the economic problem of scarcity
 Assume that an economy devotes all of its resources to the production of
only two goods, houses and automobiles
 Several possible combinations of houses and automobiles is possible, as
illustrated in the production possibilities schedule
Possibilities
Number of Houses
1
2
3
4
5
6
7
8
9
0
100, 000
200, 000
300, 000
400, 000
500, 000
600, 000
700, 000
800, 000
Number of
Automobiles
8, 000, 000
7, 000, 000
6, 000, 000
5, 000, 000
4, 000, 000
3, 000, 000
2, 000, 000
1, 000, 000
0
 If the economy uses all of its resources to produce automobiles, it can
produce a maximum of 8, 000, 000 automobiles and no houses
(possibility 1)
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 If it uses all of its resources to produce houses, then it can produce a
maximum of 8, 000, 000 houses and no automobiles (possibility 9)
 Between these two extreme cases are many possibilities
 Note that for every 100, 000 houses produced, the economy sacrifices 1
000, 000
automobiles.
 Thus the opportunity cost of 100 000 houses is 1, 000, 000 automobiles
 That is, in order to produce one house the economy must sacrifice 10
automobiles
 In this example the opportunity cost remains constant throughout
Houses
(00, 000)
Automobiles
(000, 000)
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