1. The basic economic problem Flashcards
The basic economic problem
How best to allocate scarce resources in order to satisfy people’s unlimited needs and wants
Economic goods
Goods that are scarce in relationship to demand for product. Human effort is required to obtain it. (Eg oil.)
Free goods
Goods that are unlimited in supply with no oppurtunity cost. Eg. Air, seawater
Needs
Goods or services that are required for survival
Wants
Goods or services that make people more comfortable or content but which are not necessary for survival.
Goods
Physical items that can be produced and owned.
Services
Non-physical items that can’t be owned. Eg. haircuts.
Opportunity Cost
The loss of other alternatives when one alternative is chosen.
Factors of Production
Required to produce a good or service. Captal (money, machinery), Enterprise (idea needed), Land (factory and resources that come from land eg. coal mine), Labour (to create product)
Occupational mobility
The extent to which labour is able to move between jobs. Retraining and upskilling help workers to improve occupational mobility.
Geographical mobility
The extent to which labour is able to move to different location for employment purposes.
Consumer
People who buy or use goods and services to satisfy their wants.
Producer
Someone who creates and supplies goods or services.
Scarcity
The problem of unlimited wants and limited resources. Scarcity requires people to make choices and decisions about how to allocate resources efficiently to satisfy basic needs and as many wants as possible.
GDP
The value of the goods and services produced within a country’s borders in one calendar year.
PPC Assumptions
- Economy operating at full capacity (FoP fully used + producing max)
- Economy is efficient –> resources are used in least costly manner
- The chosen production combination of the two goods or serices is the one most wanted by society
- All resources are being used for just these two goods or services. Traditionally the PPC examined the production of either consumer or capital goods.
Trade-off
An alternative sacrificed or given up for something else.
Consequences of an outwards PPC shift
(Economic growth)
Often result in higher standard of living due to a higher income.
Higher income leads to greater spenind, wages, savings, profits, interest earnings, rent earnings and overall quality of life.
Greater savings lead to greater investment spending which leads to more productivity causing a positive loop.
Three economic problems
What to produce?
Who to produce for?
How to produce?
