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Unit 1 – Scarcity
What is Economics?
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Economics is a social science concerned with the production, distribution, and
consumption of goods and services. It studies how individuals, businesses, governments,
and nations make choices about how to allocate resources.
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It is simply analyzing how economies make decisions regarding the allocation of the
limited resources in the world.
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Economics can be broken down into 2 main branches, which is microeconomics and
macroeconomics.
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Microeconomics – This refers to the study of decision making made by individuals and
businesses that affects a single market/industry.
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Macroeconomics – This refers to the study of decision making made at the economy
level and impacts the entire country.
Prepared By – Venuja Silva
B. Com Finance and Accounting (Monash University)
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Human Needs and Wants
Needs
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Human needs are the things that are essential for humans to survive.
Example – Food, Water, Shelter and Clothing
Needs are basic, does not change and limited.
Wants
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Human wants are the things that are not essential for humans to survive.
Example – Cars, Chocolates, Computers, etc.
The Economic Problem
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Every country faces the basic economic problem of scarcity.
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Scarcity refers to the existence of unlimited wants and limited resources (Factors of
production) to satisfy them.
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This is a problem common to every economy therefore it is why it’s called the basic
economic problem.
Prepared By – Venuja Silva
B. Com Finance and Accounting (Monash University)
3|Page
Unit 2 - Factors of Production
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These are economic resources used in the production of goods and services to satisfy
human needs and wants.
There are 4 factors of production.
1. Land
2. Labour
3. Capital
4. Enterprise
Land
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This refers to all-natural resources or gifts of nature used in the production of goods
and services to satisfy human needs and wants.
Examples – Rainforests, Rivers and etc.
The economic benefit for land is Rent.
Labour
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This refers to all mental and physical efforts of humans used in the production of
goods and services to satisfy human needs and wants
Examples – Engineers, architects, designers and etc.
The economic benefit for labour is Wages/Salaries
Capital
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This refers to all man-made goods used in the production of goods and services to
satisfy human needs and wants
Examples – Machinery
The economic benefit for capital is Interest
Enterprise
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This refers to the factor of production which brings together all the other factors of
production and does decision making and bears risk to produce goods and services
to satisfy human needs and wants
Example – Entrepreneur
The economic benefit of enterprise is Profit
Prepared By – Venuja Silva
B. Com Finance and Accounting (Monash University)
4|Page
Unit 3 - Opportunity Cost
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The opportunity cost refers to the value of the next best alternative forgone when
selecting the best alternative or option.
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Example – An individual has the choice of buying a phone or a house. The individual
chooses to buy a phone and the opportunity cost of this decision is the house lost.
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In an economy the government must make economic decisions and each economic
decision bears an opportunity cost
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There exists an instance where there is no opportunity cost, and it involves Free
Goods.
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Free goods are the goods which takes no resource to produce (eg – Sunshine)
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Economic Goods – These are goods which have a degree of scarcity and therefore
producing and consuming them have an opportunity cost.
Prepared By – Venuja Silva
B. Com Finance and Accounting (Monash University)
5|Page
Production Possibility Curve
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The production possibility of a country refers to the maximum production a country
can obtain of 2 goods through full utilization of existing resources and available
technology.
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A production possibility curve graphically represents the maximum a production a
country can obtain of 2 goods through full utilization of existing resources and
available technology and shows opportunity cost.
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Production possibility of a country depends on two things.
1. Factor Availability – A country which has more factors of production usually
has a higher production possibility than a country which has a lower amount.
2. Factor Productivity – This refers to how well a country utilizes their existing
resources to produce an output. Eg – countries that don’t waste their
resources have a higher productivity.
(Eg- investment in latest technology and human capital)
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Furthermore, the production possibility curve is drawn by taking certain
assumptions.
1. Only 2 goods or commodities are produced.
2. Factor availability is constant – The availability of factors of production is constant
and therefore does not change.
3. Technology is constant – The state of technology is assumed to be constant which
goes to say that no new machinery and etc. are used.
4. Goods and resources can be easily transferred between industries.
Prepared By – Venuja Silva
B. Com Finance and Accounting (Monash University)
6|Page
Behavior of Opportunity cost and PPC
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The production possibility curve can be used to identify different behaviors of
opportunity cost. The following are the 3
1. Constant Opportunity Cost
2. Increasing Opportunity Cost
3. Decreasing / Diminishing Opportunity Cost
Constant Opportunity Cost
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This occurs when increasing the production of one commodity. What is to be lost by
the other commodity is always constant.
This means the opportunity cost of increasing will always be a constant figure
Prepared By – Venuja Silva
B. Com Finance and Accounting (Monash University)
7|Page
Decreasing / Diminishing Opportunity Cost
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This occurs when increasing the production of one product what is to be sacrificed
from the other product is always decreasing.
This means the opportunity cost of increasing production of one product is always
decreasing.
Increasing Opportunity Cost
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This occurs when increasing the production of one product. What is to be lost by the
other product is always increasing
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In other words, this is when the opportunity cost of increasing production of one
product is always increasing
Prepared By – Venuja Silva
B. Com Finance and Accounting (Monash University)
8|Page
Concepts with PPC
1. Full Employment
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This means all resources of the country are employed in the production of goods and
services and therefore operating at maximum output and efficiency.
This can be showed on a PPC as follows.
2. Economic Growth
• This refers to the continuous increase in the GDP of a country over the period
(usually 6 months)
• This can be shown as a shift forwards in the PPC
3. Scarcity
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This refers to the existence of limited resources and unlimited Wants. Due to this
it is impossible to make a proper production therefore this is shown as a cross
outside the PPC curve.
Prepared By – Venuja Silva
B. Com Finance and Accounting (Monash University)
9|Page
4. Unemployment (Underutilization of resources/Economic
Decline / Destruction of Resources)
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This refers to the under use of resources therefore the economy is not operating
at maximum efficiency and capacity and therefore this is noted as a shift inward
in the PPC.
5. Employment of Resources
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This refers to the better use of resources in the country through increasing the quantity of
resources utilized.
Prepared By – Venuja Silva
B. Com Finance and Accounting (Monash University)