Econ - The nature of the economic problem

The Nature of the Economic Problem

The Basic Economic Problem:

“Unlimited wants exceeding finite resources”

Consumers

  • Consumers of goods and services

Workers

  • Suppliers of their time and effort

Firms/Companies

  • Producers of goods and services

Government

  • Producers of public goods

What is the concept of scarcity?

This is when there are unlimited demand for goods and services by customers as there are unlimited wants, but Earth’s resources are scarce. Thus, the result means that wants continue to exceed supply due to unlimited wants.

Examples regarding consumers:

  • Students can only study a limited amount of subjects at school

  • Families can only choose one restaurant to eat at

  • You can only buy a limited amount of clothes

Examples regarding workers:

  • Choosing between career paths

  • Refine their skills further or choose employment

  • Balance multiple jobs

Examples regarding companies:

  • Amount of employees to hire

  • Amount of raw materials needed

  • Amount of machines and factories required

Examples regarding governments:

  • Spending on hospitals

  • Spending on schools/education

  • Spending on the army

The nature of the economic problem

Resource allocation- The Three basic economic questions

What do produce?

How to produce?

Who to produce for?

Companies and firms need to ask themselves:

What should we produce?

  • as resources, labor, materials are limited

  • choosing one thing over another

  • what are their priorities?

How to produce it?

  • what is the best way to produce the best goods and services that consumers want

  • how to mix the factors of production as to satisfy the market and efficiency

Who to produce for?

  • who should receive the products?

  • how much money should we charge?

Economic goods and free goods

Economic products

  • requires the use of resources to produce

  • opportunity cost involved as it utilized factors of production in order to be made

Opportunity cost:

  • the potential benefits lost from the option not selected, whether explicit or implicit

Free good

  • takes no resources to create

    • sunshine

    • oxygen

  • no opportunity cost because it did not utilize factors of production

Factors of production and their rewards

Factor of production is the economic resources of land, labor, capital, and enterprise

Required of any economic good or service

Resources:

  • Capital

    • “Goods used to produce other goods and services”

    • Manufactured goods that makes another good

    • Producer good

    • Offices, factories, machines, railways, and tools

    • The reward of capital is interest

      • Financial institutions/owners of capitals are rewarded interest charged because lending involves risk. The payment received must exceed the interest paid.

  • Enterprise

    • CEO or leader of company: risk bearing/key decision makers

    • will have willingness to make risks

    • organize factors of production

    • decides on what is produced

    • The reward of enterprise is profit

      • If done right, they will take in massive profits if successful, the risk is seen as an investment, running an organization

  • Land

    • gift of nature available for production

    • farms need land to grow crops

    • offices need land

    • natural resources used for production of goods: water/oil/wood

    • The reward for land is rent

      • The users of the land will always have to pay rent. The landowners receive rental income. The rental income is to compensate landowners for the scarce resource. The profit needs to exceed rent

  • Labor

    • Human effort used in producing goods and services

    • All human effort

    • Mental and physical effort

    • Road sweepers, bankers, teachers

    • The rewards for labor is salaries

      • The wages are paid to workers in exchange for their labor time and resources for production, in exchange for their productivity

Quality and quality of factors of production

  • In order to increase the amount of CEOs in the economy, they need to lower taxes on companies, reduce government regulations

  • In order to increase the quality of enterprise, there should be a good education system and access to schools

  • Quality of the land is the soil type, how fertile the soil is, the weather in the region, etc,.

  • Quantity can be increased by land reclamation

  • Capitals depend on how much investments are made over a period of time

    • new machines run more efficiently with time

    • tech increases the quality and quantity of goods produced

  • Education, training, higher concentration and motivation, working with complex machinery, healthcare will increase the quality and quantity

Opportunity Cost

Opportunity Cost - “The best alternative foregone”

  • Consideration of alternatives

  • Cost of decisions in terms of the best alternative presented

  • Decision makers will choose the option that gives them the greatest benefit (e.g. profit)

Consumers

  • decide on what to buy (purchasing goods and services)

    • thus, they give up the benefits of purchasing another product

Workers

  • decide on which business to work on - workers working in one company sacrifices working for another

  • specializing in a particular profession means giving up the opportunity to pursue other jobs

Producers

  • choose between competing business opportunities

    • decide how best to allocate its resources

Governments

  • opportunity cost of which public goods to spend on

Production Possibility Curves (PPC)

Production Possibility Curves - “Represents the maximum combination of goods and services produced in any economy”

PPC Diagram

Movements along a PPC

When an economy is operating along the curve, it shows that all resources are deployed efficiently in the factors of production.

Moving from Point A to Point B represents an opportunity cost.

In order to move, it needs to sacrifice some consumer goods to make more capital goods

Shifts along the PPC

Outward shift of the curve

  • Quality of factors of production increase

  • Quantity of factors of production increase

Inward shift of the curve

  • Quality of factors of production decrease

  • Quantity of factors of production decrease