THE ECONOMIC
PROBLEM
CHAPTER 1
Learning objectives
• Explain the problem of scarcity.
• Describe opportunity cost.
• Discuss production possibility curves.
• Explain causes of positive and negative economic growth.
THE PROBLEM OF SCARCITY
Key terms
• Goods are things that are produced in order to be sold.
• Needs are basic requirements for human survival.
• Wants are people's desires for goods and services.
THE PROBLEM OF SCARCITY
FINITE RESOURCES
• The world has finite resources.This means having an end or a limit.
• These resources are generally referred to as the four factors of
production: Land, Labour, Capital and Enterprise.
THE PROBLEM OF SCARCITY
• Resources are more scarce in some countries than others.
THE PROBLEM OF SCARCITY
• Other than needs, humans have wants or desires.
• These wants are said to be infinite.This means without limits.
ACTIVITY 1
MAKE A LIST OF WHAT YOU THINK ARE VERY IMPORTANT ITEMS WITHOUT
WHICH YOU WILL NOT SURVIVE AND THOSE ITEMS WHICH ARE WANTS.
Needs
Wants
THE ECONOMIC PROBLEM
Key terms
Basic economic problem is the allocation of a nation's scarce
resources between competing uses that represent infinite
wants.
Scarce resources are the amount of resources available when
supply is limited.
Allocate is to decide officially that a particular amount of
money, time, etc should be used for a particular purpose.
THE ECONOMIC PROBLEM
• The problem is that the worlds resources are finite.
• The worlds wants are infinite.
• Decisions have to be made as how to allocate those scarce
resources.
THE ECONOMIC PROBLEM
Note: To overcome the basic economic problem, important decisions
have to be made.
1.What to produce.
• It is impossible to produce all of the goods a country wants.
THE ECONOMIC PROBLEM
2. How to Produce?
• The four factors of production can be organised in different ways
to produce the same goods.
THE ECONOMIC PROBLEM
3. For whom to produce?
• Should everybody get the same quantity of each good?
OPPORTUNITY COST
1. Individuals have to choose how to spend their limited budgets.
2. Firms also have to choose how to spend their money, for example
advertising or a new machine.
3. Governments must also decide.
Note:
Choices is deciding between alternative uses of scarce resources.
OPPORTUNITY COST
• Opportunity cost is the cost of the next best alternative given up
(When making a choice)
• A sacrifice has to be made when making a choice.
• Sacrifice is something valauble that you decide not to have, in order
to get something that is more important.
Did you know?
• Costs refer to the expenses and drawbacks of a particular choice.
• Benefits refer to the advantages of a particular choice.
Example of opportunity cost
• Assume that the government's spending desires are placed in order of
preference as below:
1.New motorway
2.New hospital
3.Increase welfare benefit
4. Improve care for the menttally ill
Note:
• The new motorway is the government's preferred choice. The
opportunity cost in this case is the benefit lost from not building
the new hospital, that is, the benefit lost from the next best
alternative.
Production Possibility Curves
(PPCs)
Key terms
• Capital goods are those purchased by firms and used to produce
other goods such as factories machinery, tools and equipment
• Consumer goods are those goods purchased by households such as
food, confectionery, cars, tablets and furniture.
• Production Possibility Curve(PPC) is the line that shows the
different combinations of two goods an economy can produce if all
resources are used up.
ACTIVITY 2
• To construct Possibility Production curve given data
% of resources
% of resources
devoted to
devoted to
production
Number production Pounds
of guns
of butter
of butter Row
of guns
0
20
40
60
80
100
0
4
7
9
11
12
100
80
60
40
20
0
15
14
12
9
5
0
A
B
C
D
E
F
A Production Possibilities Curve from
the Table
PPC
Butter
1 pound 15 A
of butter
14
2 pounds
of butter 12
B
C
D
9
5
E
5 pounds
of butter
0
4
4 guns
7
3 guns
9
F
11 12 Guns
1 gun
A production possibility of a country
The production possibility curve diagram should be
used to show:
– the maximum productive potential of an economy or
productive efficiency.
– fully employed or unemployed resources.
– opportunity cost.
– positive or negative economic growth that shifts the
production possibility frontier (PPF) outwards and
inwards.
– possible and unobtainable production.
Note
Therefore:
– any point on the PPF shows efficient production or
maximum quantities that can be produced (Productive
Efficiency)
– any point inside the PPF shows inefficient production
or unemployed resources. Example: unemployed workers,
factories idle, production inefficiently organised.
– any point outside the PPF is currently unobtainable
Figure 1.6 Page 9
What happens when an economy moves
from one point on the PPC to another?
• Figure 1.6 moves from B to C. The lost production of consumer
goods is 6 million units. This is the opportunity costs
Note:
• If a country produces more capital goods, it will probably be able to
produce more consumer goods in the future. This is because capital
goods are used to produce consumer goods.
• However, by doing so there will be fewer consumer goods today and
some people will have less in the short-term.
CAUSES OF POSITIVE AND NEGATIVE
ECONOMIC GROWTH
key terms
• Economic growth is the increase in the level of output by a nation.
• Proportion is part of a number or an amount, considered in relation
to the whole.
• Vocational is the training that teaches you the skills you need to do
a particular job
CAUSES OF POSITIVE AND NEGATIVE
ECONOMIC GROWTH
• Positive economic growth-if countries produce more, the PPC will shift
outwards.
CAUSES OF POSITIVE AND NEGATIVE ECONOMIC
GROWTH
Positive economic growth reasons
• Increasing Immigration
• Increasing birth rate
• Reducing school leaving age
• Increasing retirement age
• Investment in capital goods
• Investment in training and education
• Increased quantity and quality of capital
• Research and developmentsome countries find new resources that enable
them to produce more
• Improved efficiency
• New or improved technologies
CAUSES OF POSITIVE AND NEGATIVE ECONOMIC
GROWTH
Negative economic growth-if countries productive potential falls, the PPC will shift
inwards.
CAUSES OF POSITIVE AND NEGATIVE ECONOMIC
GROWTH
Negative economic growth reasons
• Economic decline such as recession
• Wars and conflicts
• Disaeases
• Natural disasters
• Harvest failures
• Increasing emigration highly qualified, skilled and experiemced workers.
• Resource depletion such as natural resources e.g. Oil and Coal.
• Dry weather for agricultural prodcution