The basic economic problem

What is the difference between need and wants?

Needs are just the things you need to survive

Wants are unlimited and include anything a consumer would like whether they can purchase it or not

What is the basic economic problem?

How to best use the limited resources to satisfy the unlimited wants of consumers

What are unlimited wants?

The desire for everything a consumer would like whether they have resources to purchase it or not

What are Scarce Resources?

When there are fewer resources to make goods and services than are desired.

-Finite,limited and insufficient

How does Uk approach the economic problem?

1)What goods and services should be produced with available resources?

2)How should resources be used most efficiently to produce these goods?

3)How should the goods be allocated among the population?

1)Most decisions are made based on what consumers are willing and able to buy. The government intervenes in some markets by providing goods directly to consumers.

2) Producers will mostly determine how goods are to be produced as they look for lowest costs.

3) In most instances goods and services are allocated to consumers who can afford to buy them. The government sometimes intervenes where goods and services are deemed particularly important to the economy e.g. free education to all under 19.

What is Opportunity cost?

Something that is given up when making a decision on the use of scarce resources.

Or the value of the next best alternative when making a decision.

How is not spending a opportunity cost?

-When you save you earn interest on your savings but in return you can’t use that money to purchase goods or services.

-So opportunity cost of saving is not being able to have goods or services now and conversely the opportunity cost of spending it not being able to make interest on your money and spend it later.

How can opportunity cost apply to firms?

Firms are always making economic choices and this include evaluating the opportunity cost of their options in order to maximise their use of scarce resources like savings,profits,labour and capital.

How can opportunity cost be applied to the government?

-Governments faces opportunity cost in its decisions. For example government sets a budget each year.

-A budget deficit can give the government more money to spend to boost the economy now but the opportunity cost is higher debt repayments and less to spend later

-Also budgets are divided between areas of spending. So if government spends budget on education there’s a opportunity cost as they could’ve spend that on the army.