The Nature of Economics

The economic problem

Our wants are infinite, but our resources are finite, therefore we must choose between them.

Wants

the material desires of individual or the community. they are items that provide some pleasure or satisfaction when they are consumed.

individual wants

desires of each person

collective wants

the wants of a whole community (e.g a park)

Unlimted Wants

as soon as one want is satisfied, we will seek to satisfy another

Recurrent wants

we will have to satisfy this want over and over again.

Complementary wants

wants that go with another want (e.g car + petrol)

what questions do we have to ask in regard to the economic Problem

What to produce?

How to produce?

How much to produce?

how to distribute production?

Opportunity Cost

the alternative use of resources that is, foregoing one want to satisfy another.

Individual factors

limited income (resources), to choose between many wants (in the form of goods and services)

Business factors

a firm has the opportunity to produce an alternative good when they make the choice to produce something else with its scarce resources.

Government factors

limited resources to satisfy community (collective wants)

Production Possibility Frontier (PPF)

the concept of opportunity cost can be shown in a model called the PPF.

The model is a graph which shows all combinations of goods and services that can be produced by an economy given the available resources and technology.

Calculating the PPF

To calculate the opportunity cost of a good (one unit), e.g produce the unit of good B = good A/Good B

What are consumer goods and services?

Items produced for the immediate satisfaction of individual and community needs and wants.

What are capital goods?

Items that have not been produced for the immediate consumption but will be for the use of production for other goods.

Future implications of current choices

producing more consumer goods in the present will satisfy consumer demand immediately

producing more capital goods in the present will increase our future productive capacity and promote long economic growth.