Basic Economic Problems
Presented by
Tom Wei
Scarcity
• The basic economic problems is about scarcity and choice.
• How to allocate scare resources given unlimited wants.
• To understand scare resources, we need know what is scarcity.
• The opposite of scare resources is free resources.
Free resources
• Air
• Sun light
• Seawater
• Gravity
• Etc.
Scare resources
• Land
• Oil
• Labor
• Skills
• Etc.
Factors of production
• Another name of resources is factors of
production.
• There are four factors of production
▫ Capital human-made goods which are used in
the production of other goods.
▫ Enterprise In markets, entrepreneurs combine
the other factors of production, land, labour,
and capital, to make a profit.
▫ Land naturally occurring goods.
▫ Labour human effort used in production.
CELL
Factors of production
Examples
▫ Capital
▫ Enterprise
-Machineries
-Tools
-etc.
-Management
-Innovative
-etc.
▫ Land
▫ Labour
-Water
-Minerals
-etc.
-Production workers
-Skilled workers
Choice
• The basic economic problems is about scarcity and choice.
• Because of the resources are sacred, we are forced to make choices.
• There three questions about how to make choices.
Choice
• WHAT
-What to produce?
• HOW
-How to produce?
Business decide based
on consumer demand.
Business decide based
what is most costeffective way to
produce.
• WHOM
-For whom to
produce for?
Who has enough
income to afford the
goods and services.
Opportunity cost
• We need a way to measure our choices. That is where we introduce the
concept of opportunity cost
• The definition of opportunity cost
▫ The cost of the next best alternative forgone when a choice is made.
Gain of alternative
choice
=
Opportunity cost
Good choice
Bad choice
Value of current choice
>
Opportunity cost
Value of current choice
<
Opportunity cost