SECTION 1

Basic Economic Problem

The study of economics involves examining and informing decisions about how best to use
scarce resources in an attempt to satisfy many of our needs and wants as possible to maximise
economic welfare.

➔ Scarcity- a situation where there is not enough to satisfy everyone’s wants.

➔ Occupationally mobile = capable of changing use
➔ Geographically mobile = capable of changing location

Factors of production- resources employed to produce goods and services, can be

categorised as:
1. Land-
➔ covers all natural resources, the Earth on which the crops are grown &
what is beneath & found on it.
eg- seas, rivers, all manner of minerals from the ground, chemicals,
gases from the air & Earth’s crust, elements, etc.
➔ payment received: rent
➔ most land is occupationally mobile, while land (in the traditional sense) is
geographically immobile.

2. Capital-
➔ refers to man made resources which help to produce many other goods &
services.
eg- offices, buildings, tools, machinery, etc.
➔ also referred to as producer goods, these are not wanted for their own
sake but for what they can produce.
➔ consumer goods, on the other hand, are man made too but are wanted
for the satisfaction they provide to their owners. In deciding whether a
good is a capital or consumer good, it is necessary to consider who the
user is & the purpose of its use.
eg: a computer used in an office- capital good
a computer used to play games- consumer good
➔ payment received: interest
➔ mobility depends on certain factors

3. Labour-
➔ covers all human effort, both mental and physical involved in producing
goods & services.
➔ human capital refers to education, training and experience that workers
have gained.
➔ payment received: wages.

4. Enterprise-
 ➔ the skill and risk taking ability and business know-how of the person who
brings together all the other factors of production together to produce goods
and services.
➔ the people who have enterprise can control and manage firms- entrepreneurs
➔ entrepreneurs organise the other 3 factors of production & bear risks of
losing their money if the business fails [uncertain risks]
➔ most mobile factor of production
➔ payment received: profit

➔ public goods-
◆ are the goods and services which are provided by a govt. because everyone
benefits from them, even if they don’t pay for them.
◆ the govt. provides them because nobody would pay for their use & people who
choose not to pay [free riders] would still benefit from the service.
eg- police, law & order, street lighting, etc.
◆ usually funded by taxes

➔ merit goods-
◆ goods that are underproduced and underconsumed
◆ benefit the consumer more than they think
◆ generally provided by the govt. because they think consumers ought to benefit
from them even if they cannot afford to buy them & to benefit the economy
◆ eg- health and education
◆ their consumption results in substantial benefits (can also be referred to as
positive external effects or externalities), for eg- vaccinations against a particular
disease.
◆ everyone benefits if these are provided at a low cost

➔ demerit goods-
◆ goods that are overproduced and over-consumed
◆ harms the consumer more than they think
◆ generally the govt. takes actions to limit their consumption & production, by
placing a tax on them, or increasing their prices, because they think it disbenefits
consumers and the economy.
◆ eg- cigarettes, alcohol, drugs

➔ free goods-
◆ goods which do not take scarce resources to make & thus do not involve an
opportunity cost
◆ eg- sunshine, water, wind

➔ economic goods-
◆ goods which take scarce resources to produce & whose production involves an
opportunity cost
◆ limited in supply
 ◆ eg- education is an economic good because teachers & resources used to
provide it could have been employed for making other products.

➔ opportunity cost-
◆ next best alternative foregone
◆ since we cannot produce everything, an economic concept called opportunity
cost exists, which is the value [not a benefit] of the choice of the next best
alternative foregone while making a decision.

◆
◆ more examples- A person who invests $10,000 in a stock denies themselves the
interest they could have earned by leaving the $10,000 dollars in a bank account
instead. The opportunity cost of the decision to invest in stock is the value of the
interest.
If a city decides to build a hospital on vacant land it owns, the opportunity cost is the
value of the benefits forgone of the next best thing which might have been done with
the land and construction funds instead. In building the hospital, the city has forgone
the opportunity to build a sports centre on that land, or a parking lot.

◆ opportunity cost & consumers: consumers are buyers of goods and services,
& we cannot buy everything we like. If we choose to buy a book, we may not be
able to buy a pencil box.

◆ opportunity cost & workers: people employed as teachers might also be able
to work as civil servants. They need to carefully consider their preference for the
jobs available. If the pay of civil servants or their working conditions improve, the
opportunity cost of being a teacher will increase.

◆ opportunity cost & producers: producers have to decide what to make. A

farmer cannot grow rice and wheat on the same patch of land. In deciding what
to produce, private sector firms will tend to choose the option which will give
them the maximum profit.

◆ opportunity cost & the govt.: the government has to carefully consider its
expenditure of tax revenue on various things. If it decides to spend more on
education, the opportunity cost may be reduced govt. spending on healthcare.

➔ production possibility curve :

◆ a PPC illustrates the concept of opportunity cost, thus it can also be called
opportunity cost curve.
◆ A PPC shows the maximum output of two products and combinations of these
products that can be produced with existing resources and technology.
◆ A point inside the PPC represents underutilization of resources and that outside is
not attainable with given resources and technology
 ◆ causes of shifts in a ppc:

➔ labour force- people in work and those actively seeking work

quantity of the labour force increases when:
➔ the retirement age increases
➔ the school leaving age decreases
➔ there are better attitudes towards working women
➔ the population increases

➔ productivity- the output per factor of production in an hour

◆ productivity is silent on quantity
◆ output is the goods produced by fop.

what affects the quality of fop:

 quality of land increases when:
➔ fertilizers are used
➔ firms are stopped from polluting rivers
➔ there is provision of good drainage-->leading to an increase in crop yields

quality of labour increases when:

➔ there is better education
➔ there is better healthcare
➔ there is better training
➔ more experienced workers

quality of capital increases when:

➔ advances in technology enable capital to produce a higher and better quality output

quality of enterprise increases when:

➔ there is better education & training
➔ there is better healthcare
➔ there are more experienced entrepreneurs

➔ negative net investment= gross investment-depreciation

negative net investment refers to the reduction in capital goods caused by some obsolete &
worn out capital goods not being replaced.