THE BASIC ECONOMIC PROBLEM

chap 1-4

The economic problem

unlimited wants exceeding finite resources

Economic good

scarce in supply

produced with opportunity cost

Free good

abundant in supply

natural resources

Factors of production

the economic resources of land, labour, capital and enterprise

Land

non manmade natural resources available for production

Capital

manmade resource that is used to produce g/s

Labour

human input into production process (physical and mental)

Enterprise

involves taking risks in setting up or running a firm

Opportunity cost

the next best alternative that is forgone

Production possibility curve (PPC)

an economic model that considers the maximum possible production (output) that a country can generate if it uses all of its factors of production to produce only two g/s

Microeconomics

the study of the behavior and decisions of households and firms, and the performance of individual markets

Macroeconomics

the study of the whole economy

Planned economic system

an economic system where the government makes the crucial decisions, land and capital are state-owned and resources are allocated by directives

Mixed economic system

an economy in which both the private and public sectors play an important role

Market economic system

an economic system in where the consumers determine what is produced, resources are allocated by the price mechanism and land and capital are privately owned

Price mechanism

the way the decisions made by households and firms interact to decide the allocation of resources

Capital-intensive

the use of high proportion of capital relative to labour

Labour-intensive

the use of high proportion of labour relative to capital

Demand

the willingness and ability to buy a product

Supply

the willingness and ability to sell a product

Market equilibrium

a situation where demand and supply are equal at the current price