UNIT 1: THE BASIC ECONOMIC PROBLEM
Economics is the study of scarcity and its implications for resource allocation in society.
The basic economic problem is that resources are scarce. There are finite resources available in
relation to the infinitive wants and needs that humans have.
Due to the problem of scarcity, choices have to be made by producers, consumers, workers and
governments about the most efficient use of these resources.


All stakeholders in an economy face the basic economic problem
Consumers
Producers
Workers
In a free market,
 Producers selling products  Workers may want a
scarcity has a direct
made from scarce
more comfortable
influence on prices.
resources will find their
and safer working
costs of production are
environment but
higher than if they were
their employers may
The scarcer a resource
products made from more
not have the
or product, the higher
abundant resources
resources to provide
the price consumers
it
will pay


Government
Governments have to decide
if they will provide certain
goods / services or if they
will allow private firms to
them instead
Their decision influences
the allocation of resources in
society.

Economic goods are scarce in relation to the demand for them. This makes them valuable. Due to
their value, producers will attempt to supply them in order to make a profit. Anything that has a
price tag is known as an economic good. An economic good is a good with an opportunity cost.
Eg: bottled water and clothes

Free goods are abundant in supply, due to this abundance, it is not possible to make a profit from
supplying free goods. Eg: sunlight, the air we breathe etc

Public goods are goods and services provided by the government without any cost. Eg: law and
order, street lights

Merit goods are those goods and services that are subsidised or provided free at the point of use.
Eg: education and healthcare

A consumer good is any good that satisfies consumer wants and they are end products which have
no future productive use. Eg: A watch
 Capital goods are man made resources to help produce other goods and services
FACTORS OF PRODUCTION
Factors of production are the resources used to produce goods and services (Land, Labour, Capital and
Enterprise).
The production of any good / service requires the use of a combination of all four factors of production.
Factor of
production
Reward
Mobility
Natural resources are available for production.
Some countries have a vast amount of a particular
natural resource and so are able to specialise in its
production.
Land
Labour
Capital
Enterprise
The human input into the production process.
Some workers are more skilled and productive
than others due to a difference in education,
training and experience.
Rent
Wages
Geographically & occupationally
mobile
Interest
Depends on the nature and use of
the capital
Machinery and equipment used to produce output
Enterprise involves taking risks when setting up a
firm. An entrepreneur decides on the combination
of the FoP necessary to produce output with the
aim of making profit
Geographically immobile
Occupationally mobile
Profit
Geographically & occupationally
mobile
Labour mobility
Labour is often one of the most expensive costs of production. If firms can substitute capital for labour,
productivity often increases and the cost of production will decrease. Many firms reply on labour and
ensuring labour mobility helps to lower unemployment and reduce worker shortages in an economy.
OPPORTUNITY COST
Opportunity cost is the next bet alternative that is sacrificed in order to satisfy the other.
PRODUCTION POSSIBILITY CURVE
A production possibility curve (PPC) is an economic diagram that considers the maximum output that a
country can generate if it uses all of its factors of production to produce only two goods/services.
1.
The use of PPC to depict the maximum potential of an economy
The curve demonstrates the possible combinations of
the maximum output the economy can produce using all
of its resources (factors of production)
At A, its resources are used to produce only consumer
goods (300)
At B, its resources are used to produce only capital
goods (200)
Points C & D, both represent full (efficient) use of an
economy’s resources as these points fall on the curve.
At C, 150 capital goods and 120 consumer goods are
produced.
2. The use of PPC to depict opportunity cost
To produce one more unit of capital goods, the economy
must give up production of some units of consumer
goods (limited resources)
If the economy moves from point C (120,150) to D (225,100), the opportunity cost of producing an
additional 105 units of consumer goods is 50 capital goods. A
A movement in the PPC occurs when there is any change in the allocation of existing resources within an
economy such as the movement from C to D.
3.
The use of PPC to depict efficiency, inefficiency, attainable and unattainable production
Producing at any point on the curve represents productive efficiency
Any point inside the curve represents inefficiency (point E)
Using the current of level of resources available, attainable production is any point on or inside the curve,
and any point outside the curve is unattainable (point F)
SHIFTS IN A PPC
Economic growth occurs when there is an increase in the
productive potential of an economy.