The basic economic problem

Three fundamental choices that must be answered to solve the Economic problem:​

WHAT is to be produced?​
HOW is production to be organised?​
FOR WHOM is production to take place?​

Opportunity Cost

The benefit lost from the next best alternative forgone.​

Assumptions

Available choices can be ranked in terms of the benefits to be gained. One choice will be the "best" and the others are given up.

Economic Good

A good which has an opportunity cost.​

Free Good

where there is no opportunity cost. This as there is zero degree of scarcity, but abundance. Free goods cannot be traded because nobody would ever pay for them- there is no point. (air, wind, sea).​ Nothing must be foregone to consume them.

Factors of production

The resources used in the production of goods and services​

Human Needs

the minimum that is necessary for human survival. FINITE​

Human Wants

desires for non-essential consumption. INFINITE​

Problem

Resources are scarce (Finite). However, since human wants are unlimited choices must be made as scarce resources have to be allocated between competing uses.​

The Basic Economic Problem

SCARCITY (there aren't enough resources to meet everyone's wants)

Factors of production AKA

Factor inputs, inputs, resources​

Types of Factors of production

Land, Capital, Labour, Enterprise​

Land

Raw materials used to make goods​. All natural resources below the earth, on the earth, in the atmosphere and in the sea - Not just the ground!​

Non-Renewable

a natural resource which cannot be replenished (produced, grown or generated) E.g. include Coal, Oil, Gold, Gas and Copper​

Renewable

resources replaced by natural processes consequently they can be used and replaced. E.g. fish, forests, wind, solar power​

Sustainable

replaced by natural processes at a rate comparable or faster than its rate of consumption by humans. They can be used and replaced, Rate of replenishment > rate of use. E.g. wind, solar power and sometimes fish/ forests​

Unsustainable

resources which are diminishing over time due to economic exploitation. Rate of replenishment < rate of use. E.g. some fishing/ forests​

Capital

Man-made resources used in production of other G&S​. Machines, roads, factories, schools, office blocks, etc.​
Financial capital refers to money that will be used by a firm to purchase resources later on​

Fixed Capital

Includes factories, offices, machinery. Fixed in the sense that it will not be transformed into a final product​

Working Capital

Includes raw materials, semi-manufactured and finished goods waiting to be sold.

Labour

Human Input into the Production Process​. Skilled, Unskilled, Educated and Uneducated​

Human Capital

an individual's level of skills, qualities and qualifications​

Enterprise

Providing the initial ideas and taking risks with their own money​ The entrepreneur organises the other 3 Factors of Production​. Eg - Bill Gates, Jeff Bezos, a trader selling fruit and veg at a market

Capital intensive

Firms which use a higher proportion of capital than labour​

Labour intensive

Firms which use a higher proportion of labour than capital​

Factor incomes

The income derived from selling the services of the factors of production
Rents: Income from selling/leasing natural resources​
Interest: Income generated by the use of capital​
Wages: Income as a reward for labour​
Dividends: Income that goes to the entrepreneurs