Economics: The basic economic problem

The basic economic problem

Key terms -

1. wants: desire for goods and services

2. resources: input used to produce goods and services

3. the basic economic problem: where unlimited wants are greater than resources finite resources

4. scarcity: a situation where there are not enough resources to satisfy everyone’s wants

5. free good: a product which does not require any resources to make it

6. economic good: a product which requires any resources to make it

1.1: Finite resources and infinite wants

• wants are infinite while the resources that are required to make the things people wants are finite

• the mismatch between what people want and the maximum that can be produced gives rise to the basic economic problem

• the basic economic problem arises due to scarcity of resources

1.2: Resource allocation decisions

• 3 fundamental questions all economies have to answer are

        1. what to produce

        2. how to produce

        3. who to produce for

• A decision has to be made as to how the economy’s resources are to be allocated

• once the decision is made, an economy has to decide on how the products are to be produced

• as it is not possible to produce enough goods and services to satisfy the wants of everyone, it is necessary to decide how the products should be distributed

1.3: Economic goods and free goods

• most goods and services are economic goods

• resources are used to produce economic goods so they are limited in supply

• free goods are much rarer; it is a product that you do not have to pay for