CHAPTER 1: NATURE OF THE BASIC ECONOMIC PROBLEM
UNLIMITED WANTS AND LIMITED RESOURCES
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The basic economic problem is that unlimited wants exceed limited resources.
Scarcity is when there are insufficient resources to satisfy everyone’s wants. This is
because wants are unlimited while resources are limited.
SCARCITY
↓
BASIC ECONOMIC PROBLEM
(Wants > Resouces)
↓
CHOICE
↓
OPPORTUNITY COST
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Opportunity cost is the next best alternative forgone when making a choice.
ECONOMIC GOODS AND FREE GOODS
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Economic goods are products that require resources to produce and hence have an
opportunity cost. Eg: Cars, Pumpkins, Bottled Water, Public Libraries.
Free Goods are products that do not require any resources to produce and therefore
doesn’t have an opportunity cost. Eg: Water, Sunlight, Air.
CHAPTER 2: FACTORS OF PRODUCTION
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Factors of Production are the economic resources of Land, Labour, Capital and Enterprise.
They are all limited in supply.
1. Land: The gifts of nature available for production.
Eg: Coal, Fish, The Ocean.
The return for land is rent.
2. Labour: The physical and mental human effort used in producing goods and services.
Eg: Bank Managers, Road Sweepers.
The return for labour is wages/salaries.
3. Capital/Capital Goods: The man-made goods used in producing goods/services.
Eg: Machinery, Tools.
The return for capital is interest.
∙ Consumer goods are man-made goods used for consumer’s personal satisfaction.
Eg: food, clothing.
Tip: To decide on whether a good is a capital or consumer good, you have to consider
1) Who uses the product (A company/A private individual)
2) The purpose of it’s use (To generate an income/ For personal satisfaction)
4. Enterprise: The willingness and ability to bear uncertain risks and to make decisions in a
business. Entrepreneurs organize the other Factors of Production(Land,Labour,Capital).
The return for enterprise is profit/loss.
MOBILITY OF FACTORS OF PRODUCTION
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Occupational Mobility is the ability to change the use of factors of production.
Geographical Mobility is the ability to move factors of production from one location to
another.
1) Land is occupationally mobile, but is usually geographically immobile.
2) Labour can be occupationally mobile if they have the skills/education/experience to
change jobs.
Labour may be geographically immobile in some situations:
1. Difference in prices and availability of housing in certain areas.
2. Family ties.
3. Difference in education systems and language barriers.
4. Lack of information on availability of better jobs.
5. Border restrictions on movement of labour.
3) Capital goods that can be transported are geographically mobile.
Capital goods will be occupationally mobile only if they can be used in the production of
something else.
4) Enterprise is the most mobile factor of production. This is because they decide to
change the industry they operate in and can also decide to migrate or change locations
whenever they want to. Therefore, enterprise is mostly geographically and
occupationally mobile.