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The Economic Problem
The central purpose of economic activity is to combine resources to
produce goods and services, which meet our needs and wants.
Needs are things we need to stay alive, such as water, iPods (an iPod is
a want not a need) and clothing. Our wants are never ending and we do
not need them in order to survive.
The resources we use to produce goods and services are in unlimited
(resources are limited or finite in supply) supply. Collectively we call
these resources; factors of production. They are divided into four
groups:
Land – the natural resources used to produce goods and services
Labour - the human input into the production process
Capital – money (money is not capital. Capital is in fact machinery)
Enterprise – the person who is risking their ideas and money
The basic economic problem exists because we have infinite wants and
scarce resources.
Due to the economic problem we have to make choices. We call these
choices opportunity costs. This means the next best alternative
foregone when making a choice i.e. it is what we gain (we do not gain
with opportunity cost we give up the alternative) when making a choice.