Grade 10
Chapter 1: Basic Economic Problem
1.1 The Nature of Economic Problem
1.1.1 Finite Resources and Unlimited Wants
Needs are goods and services that are essential for survival for example; food, shelter and clothing.
Wants are goods and services that people desire to have and can survive without, for example; smartphone,
watch, television set etc.
People have unlimited wants are there is always something else that people would like and so people are
never satisfied.
Resources are used to produce goods and services that people need and want. These resources are the factors
of production and include land, labour, capital and enterprise.
Resources
NonRenewable
Renewable
Resources
Non-Renewable resources: Resources that will eventually deplete (run out/use up); that is, they are limited
in supply. Examples: oil, coal, uranium.
Renewable resources: Resources that can be replaced as they are used to produce goods and services.
Examples: timber, fish, meat. However, if these resources are used faster than the renewal rate, they will
deplete as well. Therefore, it is important to use resources at the same rate as they are being used.
These resources are used to produce goods and services and are scarce/limited.
The economic problem arises because people have unlimited wants and the resources available to satisfy
those wants are limited, giving rise to the problem of scarcity. Scarcity means a lack of resources to produce
all the goods and services that people want. Therefore, people have to exercise choices which gives rise to
an opportunity cost. The economic problem applies to everyone, for example, to consumers, workers,
producers and even governments.
1.1.2 Economic and free goods
Economic goods
Goods which are scarce relative to the demand for
them (limited in supply).
Free goods
Goods which are not scarce relative to the
demand for them (unlimited in supply).
A price is charged for these goods as they are scarce
relative to the demand for them.
No price. They are supplied at zero cost because
they are unlimited.
There is an opportunity cost.
There is no opportunity cost.
Examples: watch, book, cake….
Examples: air, sunlight, wind…
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1.2 Factors of Production
1.2.1 Definitions of The Factors of Production and Their Rewards
Factors of production is another term for economic resources. Economic resources are used to produce
goods and services and they are limited in supply. Most economists identify four factors of production
namely; Land, Labour, Capital and Enterprise.
Land refers all those natural resources which are used in the production of goods and services. Land
includes the soil itself and all natural resources that come from land, for example; fish, timber, cotton,
cocoa, mountains, sea, gold, oil. The reward for land is rent.
Labour is a human resource. Labour refers to all the efforts, whether physical or mental, which are made
by human beings towards the production of goods and services. Road sweepers, factory workers, bank
managers, teachers and doctors all contribute to labour. The reward for labour is rent.
Capital is a man-made resource. It refers to a stock of physical assets which helps us to produce other
goods and services. Capital includes tools, machinery, equipment, factories and offices. Capital goods are
also called producer goods, they are not wanted for their own sake but for what they can produce. Examples
of fixed capital are factory buildings and machines. Stock of goods or materials are called working capital
while schools and hospitals are social capital. The reward for capital is interest.
Enterprise refers to the willingness and ability to bear the risks of production and to make decisions in a
business. It is the organization of production. He takes all decisions such as what to produce, how to produce
and where to produce. Most production is undertaken in anticipation of demand. Firms will only produce
the goods which will yield profits. The reward for enterprise is profits.
In brief, organization, planning, decision making, risk bearing and management are the main functions of
the entrepreneur.
Entrepreneur: Persons who organize production.
1.2.2 Mobility of Factors of Production
Occupational Mobility: Capable of changing use/jobs.
Occupational
Occupational Immobility: Incapable of changing use/jobs.
Mobility
Geographical
Geographical Mobility: Capable of moving from one area
to another
Geographical Immobility: Incapable of moving from one
area to another.
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Mobility of Land
Geographical Mobility
Most land is occupationally mobile. This means it
can be used for a number of purposes. Land which
is currently being used for farming may be used to
build houses.
Occupational Mobility
Land is geographically immobile. For example, it is
impossible to move a section of land from Sri Lanka to
India. Some forms of land, can be moved to a certain
extent. For example, the course of rivers can be diverted
and wildlife can be moved.
Mobility of Labour: The mobility of labour varies. Some workers may find it difficult to move from one
area of the country to another (geographical immobility).
Causes of Geographical Immobility
Causes of Occupational Immobility
1. Differences in the price and availability of housing in Lack of information about vacancies in other
different areas and countries
types of jobs.
Workers who lose their jobs in poor areas may not be able
to take up jobs in rich areas because they cannot afford or
find housing there.
2. Family ties
Lack of appropriate skills and qualifications
People may be reluctant to leave the country they are (example a shortage of doctors cannot be
currently living in because they do not want to move away solved by hiring bus drivers).
from family and friends.
3. Differences in educational systems in different areas and
countries
People may not be willing to move elsewhere if it disrupts
their children’s education.
4. Lack of information
People without jobs or those in poorly paid jobs may stay
where they are because they are unaware of job
opportunities elsewhere.
5. Restrictions on the movement of workers
It is often necessary to obtain a work visa to work in another
country and these can be limited in supply.
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Mobility of Capital: The geographical and occupational mobility of capital depends on the type capital
goods.
Geographical Mobility
Geographical mobility depends on whether the
type of capital good (fixed, working or social
capital) can be moved from one part of the country
to another. For example, a photocopier used by a
bank in Port Louis can be moved to a bank in Grand
Port, therefore it is geographically mobile.
However, a coal mine or a dock are fixed in
position and cannot be moved from one area to
another, thus they are geographically immobile.
Occupational Mobility
Occupational immobility of capital is when the use of
capital cannot be changed as they are for a specific
purpose. The coal mine and the dock are
occupationally immobile since they are used for a
special purpose. On the other hand, a delivery van is
occupationally mobile since it can be used to delivery
books by a book publisher and it can be used by a toy
manufacturer for distribution of its products.
Similarly, an office block can be used for different
purposes.
Mobility of Enterprise: The mobility of enterprise depends on the mobility of entrepreneurs. Enterprise is
the most mobile factor of production.
Geographical Mobility
Enterprise is also geographically mobile. Someone
who has been successful in running a business in
one area of the country is likely to be successful in
running the business in another part of the country
as well.
Occupational Mobility
The skills of an entrepreneur can be applied in
every industry. The entrepreneur is occupationally
mobile as the entrepreneur who has managed
production in a car industry can manage production
in textile industry as well.
1.2.3 Quantity and Quality of Factors of Production
Quantity and Quality of Land
Quantity of Land
The supply of land is said to be fixed, that is, it is
difficult to increase in quantity. There is a certain
degree of soil erosion which reduces the supply of
agricultural land but also a certain amount of land
reclamation which increases its supply.
Quality of Land
The quality of natural resources may increase.
Fertilisers can be applied to fields to increase the
fertility of the land. The purity of rivers and the
health of fish can be improved by stopping
polluting the rivers for example.
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Quantity and Quality of Labour
Quantity of Labour influenced by:
Quality of Labour
1. The number of workers available
More can be produced with the same number of workers if
2. The number of hours for which they work the workers become more skilled. The quality of labour can
be improved through better education, better training, more
experience and better health care. Better trained and
educated workforce will be able to produce more and
better-quality products and a healthier workforce will be
able to concentrate more and have fewer sick leaves.
The number of workers available is determined by:
1. The size of the population: the larger the population, the more workers are there likely to be.
2. The age structure of the population: A country with a high population of people of working age will have
more workers than a country with the same population size but with a higher number of people who are too
young or too old to work.
3. The retirement age: the higher the retirement age, the more workers are there likely to be.
4. The school leaving age: the lower the school leaving age, the more workers there will be.
5. Attitude towards working women: countries where it is acceptable for women to work have a larger
labour force. Labour force = Employed + Unemployed
The number of hours that the workers work is affected by:
1. The length of the average working day (full time workers in USA tend to work more than those in the
European countries).
2. Whether the workers work part time or full time (more people in UK work part time than those in France).
3. Duration of overtime
4. Length of holidays taken by the workers
5. Amount of time lost through sickness.
Quantity and Quality of Capital
Quantity of Capital
With time and innovation, the amount of capital
goods is increasing. The production/purchase of
capital goods or replacement of old equipment is
known as investment.
Quality of Capital
Advances in technology enable capital goods to
produce a higher output and a better quality output.
The development of robotics in car production has
increased significantly the number of car
production.
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Quantity and Quality of Enterprise
Quantity of Enterprise
The quantity of enterprise will increase if the
number of entrepreneurs increase. More education,
lower corporate tax, lower government regulation
and other government incentives will increase
enterprise.
Quality of Enterprise
The quality of enterprise can be improved if
entrepreneurs receive better education, better
training, better healthcare and gain more
experience.
1.3 Opportunity Cost
1.3.1 Definition of Opportunity Cost
Since resources are scarce, we cannot consume everything we would like to consume, therefore we must
exercise a choice which leads to an opportunity cost. Opportunity cost is also known as the real cost.
Opportunity cost is the next best alternative foregone. It applies to everyone who exercises a choice
including consumers, producers, workers and governments.
1.3.2 The Influence of Opportunity Cost on Decision Making
Opportunity cost and consumers
Suppose a consumer has Rs 30 and wishes to buy a cake, a pen, a film and a marker each costing Rs 30. He
does not have enough resources; therefore, he needs to exercise a choice as his resources have alternative
uses. He draws a scale of preference in the following order:
1. Film - choice
2. Cake – Opportunity cost
3. Pen
4. Marker
He will buy the film and his best alternative foregone (second preferred good), that is, the cake, is his
opportunity cost.
Opportunity cost and workers
Given his qualifications, a worker may have several job opportunities. He will choose the job with the most
advantages. He will consider both wage and non-wage factors.
For example, with an Economics degree, a worker can choose to work as a teacher or an analyst and if he
chooses to work as a teacher then the opportunity cost is the work of an analyst.
Opportunity cost and producers
Producers have limited resources; therefore, they cannot produce everything that they would like to. They
will exercise a choice and will have to make decisions about:
1. What to produce?
2. How to produce?
3. For whom to produce?
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Suppose a producer can produce either shirts or dresses and if he chooses to produce shirts, the opportunity
cost is production of dresses.
Opportunity cost and governments
Even governments cannot undertake all the projects that they would like to because their resources are
limited, therefore, they would need to exercise a choice as to which projects to undertake and which projects
to reject or postpone. For example, a government want to build a school and to build a hospital but he has
enough resources to undertake only one project and if he chooses to build a school, he is foregoing the
building of a hospital.
1.4 Production Possibility Curve (PPC)
1.4.1 Definition of PPC
A Production Possibility Curve shows the maximum possible combinations of two goods that a country can
produce when it uses all of its resources.
Assumptions:
• The country produces only two goods.
• All resources are used efficiently.
With all of its resources, the economy can produce 35
capital goods or 55 consumer goods or any
combinations of both goods. For instance, at point A,
the economy is producing 25 capital goods and 45
consumer goods. At point B, the economy is producing
20 capital goods and 50 consumer goods.
PPC1
1.4.2 Points Under, On and Beyond a PPC
Efficient points (the economy is using all of its resources
efficiently):
Inefficient points (the economy is not using all of its
resources efficiently or resources are unused):
Scarcity (for the time being, the economy cannot
produce at the point):
Attainable points:
PPC1
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1.4.3 Movements along a PPC
The PPC can be used to show the choices made in an economy about what to produce. Movements along
the PPC can be used to illustrate opportunity cost. PPC is also known as opportunity cost curve/ Production
Possibility Frontier/ Production Possibility Boundary.
Initially, the economy is at point A producing 25 units of capital goods
and 45 units of consumer goods. Now, the economy wants to produce
at point B, that is, 50 units of consumer goods and 20 units of capital
goods. In order to produce 5 more units of consumer goods, the
economy has to sacrifice the production of 7 capital goods.
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PPC1
1.4.4 Shifts along a PPC
A PPC may shift to inwards or outwards.
PPC shifts outwards
Increase in quantity or quality of resources
available
Improvements in technology enabling more goods
to be produced
Improvements in education and training increasing
the quantity and quality of resources
Economic growth
PPC shifts inwards
Decrease in quantity or quality of resources
available
Natural disasters eg hurricanes, cyclones, droughts
decreasing resources available.
Wars destroying resources available.
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Increasing opportunity cost
Decreasing opportunity cost
Constant opportunity cost
N19/P23/Q6b Explain why the opportunity cost of becoming a teacher for one worker may be greater than
for another worker. [4]
Opportunity cost is the (next) best alternative (1) forgone (1). • One worker may have earned more than
another (1) and so would be giving up more earnings (1). • One worker may give up more non-wage benefits
(1) example e.g. promotion chances (1). • One worker has further to travel to work / higher costs of
travelling (1) loss of leisure time / time with family / lower net income (1).
J19/P22/Q4c Analyse, using a production possibility curve (PPC) diagram, the effect of damaging weather
on an economy. [6]
Definition PPC
Correctly labelled diagram + show bad weather in diagram (shift inside): 3 marks
Analysis (3 marks)
May affect quantity and quality of land (1) Resources available decreases (1) quantity of both goods
produced decreases (1)
N18/P22/Q3c Analyse, using a production possibility curve (PPC) diagram, the effects of high
unemployment in a country. [6]
Definition PPC
Correctly labelled diagram + show unemployment in diagram (point inside): 3 marks
Analysis (3 marks)
• high unemployment means that the available resources are not fully (1) and efficiently used (1)
• the economy will not be able to produce at its maximum level (1) i.e. on the PPC (1)
• output of the economy is smaller than the maximum (1) lower than potential living standards (1)
• May be negative or lower economic growth / recession (1)
•
J18/P22/Q2aWhat may be the opportunity cost of building an airport?
Opportunity cost is the (next) best alternative foregone (1). Relevant example e.g. building a hospital (1).
Cambridge report: “The majority of candidates were able to identify a possible opportunity cost of building
an airport, Not all candidates, however, brought out the meaning of opportunity cost.”
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