1.1 - The Nature of the Economic Problem

Finite resources and unlimited wants, choice and trade-offs of producers and government, economic goods, free goods

What is it?

The basic economic problem is scarcity as every society has limited finite resources and unlimited wants. Therefore a choice has to be made to allocate the resources in an efficient manner.

Why do choices have to be made in the basic economic problem?

A choice has to be made to allocate scarce resources in the most efficient manner.

Needs: items necessary for survival such as food, water, shelter & clothing/ basic needs of life.

Wants: items not necessary for survival such as electronics, transport, clothes.

Scarcity: limitation of productive resources e.g. land, capital, labour, enterprise

→ scarcity necessitates choice → choice results in opportunity cost

The difference is that needs are a necessity while wants are not.

Monetary value is the cost or price of something.

→ Scarcity refers to a limitation of productive resources like land, labour, capital and entrepreneurship.

→ Examples of scarcity are food, water, energy

**@@Capital @@**is the tools and equipment necessary used to bring a product to the market.

Entrepreneurship is the combination of these resources to package them in a manner that is valuable to consumers.

Trade-off:

An alternative sacrificed or given up for something else.

Opportunity cost: (form of a trade-off)

• Second best choice

• Is the value of the best alternative forgone (gone without) or passed up.

Economic good:

• An economic good is a good or service that has a benefit (utility) to society.

• They have a degree of scarcity and therefore an opportunity cost.

• value placed on the good can be traded in marketplace

Consumer goods:

→ Durable

• Final good that normally lasts more than year

• Laptops, furniture

→ Non-durable

• Final good that lasts less than 1 year

• Food, cosmetics

Economic services:

Use of the human capital of the seller to satisfy a specific want or need of the consumer.

Human capital:

The experience, training and education workers bring to an economy.

Free good:

• a good with no opportunity cost

• E.g. air, water, sunlight

• Adds no monetary value to the country's GDP

Characteristics of free and economic goods:

Free goods:

• Available without limits; able to consume without recovering the quantity to others

• Able to consume as much as possible without with zero opportunity cost to society

• No out-of-pocket monetary cost

• Does not use scarce resources to produce the goods

Economic goods:

• Adds value to GDP

• Requires the use of scarce resources

• Has an opportunity cost

• Has a monetary value or price in the market

Recap:

• Define the economic problem

The economic problem is unlimited wants and scarcity which is the limited number of resources such as land, labour, capital and entrepreneurship.

• Analyse examples of the economic problem

Examples include poverty, unlimited wants, limited resources. Consumers want more than they need like transport, clothes, entertainment, workers need jobs but they want more careers, producers need raw materials, money and employees but they want more money and more materials.

• Explain the difference between economic and free goods.

Economic goods are goods that have value to a country's

Analyse how technology such as Facebook, Twitter or Google exhibit any characteristics of a free good:

1. Available without limits; available to consume without reducing quantity of other

2. But since sharing ecosystem with others, may slow down your performance

3. Opportunity cost; when sharing may have limitations

4. No out-of-pocket monetary costs